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Banks' self-fulfilling fears

Robert Peston | 08:31 UK time, Wednesday, 23 April 2008

When banks were prepared to provide mortgages equal to 100% of the value of properties, it was because they - like most of us - foolishly thought that it was the natural order of things for house prices to rise.

Now that banks have rediscovered the financial law of gravity, they are insisting that house purchasers provide at least 10% of the price in the form of a deposit - so that homeowners, and not banks, would be exposed to the first 10 percentage points of any market fall. And the new norm for the better mortgage deals still available is a deposit of at least 20%.

But banks' change in behaviour acts as a downward ratchet on prices: the fear that prompted the tightening up of lending practices becomes self-fulfilling.

They have made it respectable for all or any of us to expect a 10% fall in house prices. It means rational purchasers would now ask for at least 10% off the asking price for any residential property, to protect themselves from the impact of a falling market.

Sellers may simply say no. But some will capitulate - and in time the new market clearing price would be where we are now minus 10%. How quickly that would happen is difficult to predict. Some agents are saying it's already happened. After all these months of gloomy prognostications about house prices, it will probably happen fast, like a dam bursting.

However that would not necessarily be the end of it.

Even after prices in general had fallen 10%, the buyer of any particular house could never be confident that the particular property he or she wanted to buy was being priced 10% below its peak. Houses are not like shares, where every minute change in value is recorded for posterity.

It means that even after prices have started to fall, it would still be rational for a buyer to demand a 10% reduction on the asking price, as insurance. Which is why a general expectation that prices are to fall 10% would probably precipitate a fall significantly greater than 10%.

That's one of the reasons why house prices have a tendency to drop more than is economically justified on the way down, as much as they had a tendency to overshoot on the way up.

So the banks' collective decision to withdraw all 100% mortgage offers just like that - and thus send out a signal that they fear prices could fall 10% - may not turn out to be the prophylactic measure they hoped.

Depending on the magnitude of the housing-market downturn it precipitates, banks could end up poorer as a direct consequence of their rediscovery of the virtues of prudent lending. Just deserts some might say, except that millions of homeowners would feel poorer too.


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  • Comment number 1.

    Good O'l Pessimistic Peston; welcome back off holiday

  • Comment number 2.

    Isn't it about time that mortgages were a bit more heavily regulated. How about an industry wide limit of 4 times earnings and a 10% deposit? That would keep house prices in line with incomes wouldn't it.

  • Comment number 3.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 4.

    I have been an Estate agent for 36years. A 10% fall has already happened .
    Friends all over the country confirm this the
    question will there be another 10%.

    All this is normal after a long period of rises just the reasons change. There will now be a period of static prices while all other aspects of the economy catch up.

    That is what happens in my view.

  • Comment number 5.

    It's a massive game of the prisoner's dilemma - No one bank is going to keep 100% mortgages. If they all kept them then everyone would be 'better off' and we would reach the "win:win" scenario, but there is always the incentive for one of the mortgage lenders to "cheat" and ask for a 10% deposit to protect itsself. So they all cheat, thus bringing us to the "lose:lose" situation we are in now (if you are a new home owner, looking to get on the ladder or a mortgage lender)

  • Comment number 6.

    Good comment.

    But most of the last stages of mortgage uptake as evidenced by Northern Rocks books over 2005, 2006, 2007 where from ponseii buyers chasing rising prices in cahoots with the 100% no deposit down lenders.

    With NRs together mortgage the buyers even got the money to make the mortgage payments lent to them - and NR took a huge slice of the mortgage market.

    So realistically a 10% fall from 270k to 250k on a house is only a tiny fragment of the rises over these years.

    Do you think the government and the BOE are going to inflate it all away - from the real level of inflation it certainly seems so. I would not put anything pass this bunch.

  • Comment number 7.

    Like the commercial property sector, the residential property prices are largely demand driven and this is in turn driven by the occupational side of the market - ie simple factors such as what is income, employment, interest rates, cost of living and immigration. In London right now all of these factors, except immigration are looking particularly negative. And on the immigration factor, unlike the US and Australia for example, the UK has no imigration policy to attract and retain people that benefit the economy and increase GDP. For example, 20 pub workers has a different multiplier effect than one investment banker, engineer or teacher.

    So those that bought a house as in investment vehicle should hopefully realise that in the long term, real estate is not the best investment.

    But these same harsh lessons do not apply to banks. Why? Because bankers can pass on their lending malpractices to the government and the taxpayers will bear the cost. But what about borrowers facing negative equity? Why aren't they being bailed out too? The wealthy bankers have earned their big salaries and bonuses and in some cases paid very little in tax. They keep their earnings. But the government is providing an insurance policy and encouraging this sort of business practice. Taxpayers money will never be recovered.

    Perhaps the banks need to learn a lesson. For example the airline sector goes through ups and downs - airlines are not being bailed out?

    So the banking sector right now is not that much different than those people chosing not to work and effectively being "bailed" out by other taxpayers.

  • Comment number 8.

    The worrying thing for anybody who needs to sell a house in the next couple of years, is how much an overly pessimistic market outlook will effect house prices.

    As prices were over inflated they may be overly deflated before equilibrium and a more balanced market achieved. If, as some pundits are saying, a correction of 25-30% is in order. Prices may need to fall further before rebounding and a functioning market established. Not very good news for many readers of this blog I suspect.

  • Comment number 9.


    Only the "property tycoons" who already have a house would be better off.

    In 1989 none of the young engineers I was
    working with could afford them. By 1995
    it was a buyers market and they had a wide
    choice at a sensible income multiple.

    This didn't benefit me as I had made the mistake of buying in 1989 but it benefited
    lots of my friends.

    A final thought. Lots of people wanting to move to a larger house would be delighted
    if all prices dropped 20%.

  • Comment number 10.

    A lot of this cheap lending was caused by regulation. Mortgages have been regulated since late 2004 by the FSA. At that point, this created a market based on the monthly cost and not reflecting risk. Lenders were forced to chase business by lowering their rates. These lowered rates, particularly in the sub-prime market, did not reflect the risk inherent in lending to non-conforming borrowers. Due to the regulation of the market and the FSA creating a "rate-led" market, lenders had no choice.

    I have thought since then that rates were too low and when arrears and defaults started to increase, lenders would not have sufficient resources to enable them to ride out a storm.

    Having a standard income multiple would not work as someone earning £30k a year with 4 kids can not afford the same mortgage as someone earning £30k a year with no kids. Mortgages are based on affordability calculations taking in to account individual circumstances. Surely this approach is fairer and more robust?

  • Comment number 11.


    What you have explained is just the market working in the way that it should. With a shortage of funds to lend (when compared with potential demand) the lenders will take the lowest risks on each individual loan and increase the charges to ration the funds.

    If they lent 100% they would never be able to flog it off in a CDO even if the market in such things reappears. With the IMF saying that UK residential property is 30% overvalued when compared with fundamentals, and many economists forecasting a 10% drop this year, if they lent 100% they would be expecting to be lending partly unsecured. It would be even more irresponsible than the 100% mortgage of last summer (at least last summer they still expected the prices to rise and could sell the loans on). With a shortage of funds they have no need to do that. In fact with the IMF figure of a 30% overvaluation even 90% would look foolish if were not also tightening up on the income multiples as well. Even so, those borrowing 90% now, though they may not default, could well be looking at negative equity this time next year.

    With the market expecting a fall why enter it now even if you could negotiate a discount from the seller? If the IMF is right, and we know that markets tend to overshoot in both directions, and enough people hold off from entering the market for a year or so, the market could fall rather rapidly. But when everyone knows a market is a bubble and that bubble is deflating that is what will happen.

    After all we do have a tendency to behave like sheep.

  • Comment number 12.

    A thought for today:

    Is there any equity left in the houses we live in in the UK(or indeed USA!)?

    (I mean: if we add up all of the outstanding loans on property, and also the number of properties valued at 3.5 times average income [the long term affordable ratio] is there a positive or negative balance?)

    I haven't the answer perhaps somebody who has could do the sum?

    My guess is that there is some value left, but it is only a guess.

    This is a worst case situation and should provide a 'bottom' for the market.

  • Comment number 13.

    The big question is how far prices have to fall before equilibrium is reached.

    Underpinning the prices is the fact that not all buyers need a big mortgage, and the fact that there may be overseas buyers waiting in the wings to snap up more of the UK's assets if they become cheap enough.

    I would guess that prices would be underpinned at about 60% of the peak levels, with inner-city BTL flats at maybe 50%.

    My guess is that a 40 - 50% drop would have a big impact on banks' solvency, since that implies a total loss of value of something around a trillion pounds, of which around 30%(?) is carried by the banks in the event of default. Whatever the number, its a lot bigger than the 50B on offer from the BOE.

  • Comment number 14.

    Sellers may baulk at price reductions and may think that it is better not to sell. Sitting outside of the market, however, will not preserve the supposed value of their house. Happily there will always be people who have enter the market to sell (new job elsewhere, separation etc) and only these "forced sales" set the market price for you property. In the current climate the prices achieved will be going down fast. Better to sell up now to beat the stampede.

    10%? Ha! More like 30-40%.

    Bring it on.

  • Comment number 15.

    This is all very thoeoretical and textbook and wrongly assumes that the housing market is homogenous and that purchasers decison making behaviour is driver by short term investment factors like they were buying say a share.

    The reality is differnet things are happening in different sub sectors in different parts of the country. More importantly people make their house purchasing decisions on a long term view based on whether they can afford it and whether they want to live there.

  • Comment number 16.

    Overall prices are regulated by demand and supply. Demand though, is also subject to demand and supply factors in terms of mortgages. Supply of property on the market is affected by whether individuals want to put their property on the market at any particular time. So there are a lot of factors at work. Falling prices and rising rents may make this a golden age for buy to let operators - particularly those well established in the market.

    And what if your property is repossessed and is sent to auction for disposal (as is common practice) With mortgages in short supply meaning reduced demand from property buyers, and excess supply from repossessions prices there could drop through the floor. So those with large cash nest eggs wishing to move into property might do extremely well.

    Oh and stamp duty receipts and inheritance tax receipts will go down so we can look forward to AD taxing us more elsewhere too!

  • Comment number 17.

    In the process one should ask oneself : Is it a buyers or sellers market at the moment ?
    In a buyers market (i.e. supply > demand) presumably the buyer could easily ask for discounts to offset risk. In a sellers market (i.e. demand > supply) the seller should be able to wait for the right price.
    A bit simplistic, but I suspect that, as businesses, the house builders will be the first to capitulate to buyers demands, not wanting to have all this cash (remember, now harder to come by) tied up in new houses.
    As a private seller, the answer initially is more complex. As ever factors such as the location, attractiveness of the particular property, urgency to sell etc. come into play.
    Once we start asking ourselves "Do I really need to move ?" , "Is this an investment or a home ?" then the private activity reduces e.g. for-sale signs start disappearing - seen it ?

    When buyers are predominantly buying into new property, because they can get significant discounts, then the price-balance probably tips in favour of the buyer generally, even if there aren't as many private properties for sale. Much of this is probably already be happening, and at various stages depending on local conditions. Make sense ?

  • Comment number 18.

    Was part of the part of the problem not only the availability of no deposit mortgages but also the lax checking of the applicants earnings? There are many stories of people being encouraged to inflate their annual income to get (effectively) higher multiples of their salary.

    Would a solution be to use your tax statements as the only valid evidence of earnings (plus evidence you are still in work)? This would also have the added effect that people who fiddle the tax system to minimise their income and thus pay less tax will not be able to get a large mortgage, thus adding another incentive not to fiddle the tax returns.

  • Comment number 19.

    No 5. It depends what you call a lose:lose situation.

    I know a few people who have gone through IVA's etc.. One ran up 40K on credit cards. Now they are in a lose:lose situation.

    Someone who loses value on a house still has some value in the house, which in time, will correct itself and become positive equity again.
    Much like loses on shares it's only (mostly) those that are impatient or out to make a quick buck that will lose. I couldn't care less about them.
    Bottom line : If you did not buy the house as an investment, you lose absolutely nothing if the price is corrected.

    My view is that the government should indeed impose heavy regulation, but should not stop at 4* salary. It should be 4* one persons salary. This will screw the current housing market but should mean that real people can afford a house. More importantly, people can choose to have a family again (a real one you have time to enjoy and nurture). Maybe this could even have a positive effect on the divorce rate, who knows?

    My own example proves just how silly things are. I work hard, very hard. I spend little, save much. I now have a significant deposit for when I do buy. Can I afford a house now? No.
    With with help, No....
    ....with help and someone elses average salary chucked in. Maybe but I would have to take a very big risk!

    So someone on a good salary with someone on an average salery who has help and a large deposit is having problems?
    To me this is shocking, but I admit I am biased.

    Something is wrong in the economy and it does need fixing. Unfortunately the government is sticking a band aid on a heart attack victim so he can carry on smoking, boozing and eating fatty foods.

    Maybe we should not been providing liquidity to the markets? Is this blindly treating the symptom and maybe even preventing recovery? Again who knows?

    We should be looking at the cause of the problem and then deciding what the best treatment.

    It's not so much why the credit markets are essential as why is debt so essential (think back to my friend who went on an IVA for 40K of card debts)

    We need to start accepting that if the housing market is overvalued, which no-one disputes. A correction is the best thing that can happen, be that quick or slow (long term quick would be better). Given this the government should accept this as a fact of life an concentrate more on fixing the root cause.

    If England needs a tripple heart bypass lets stop arguing against it and get it done so we can start on the long road to recovery.

  • Comment number 20.

    I still have one lad at home and we were talking about this last night.

    He is fairly well 'connected' work-wise, and he informs me that even local estate agents are saying ..if its advertised for £220K then offer £190K or even less.

    This is not the end of the world ... on ehas to consider very carefully who actually benefits from higher and higher house prices.

    Generally speaking, it is all those 'on a commission' i.e. estate agents, solicitors and the Government.

    I would not lose too much sleep over that lot.

  • Comment number 21.

    Amazing how greed clouds intelligence.... The banks wanted to make big bucks... gave away easy credit and allowed the housing market to rise rise rise.... 100+% mortgages were given away... the bankers were given their massive bonuses.... They might feel a sting but its no way near as bad as the poor punter on the other end.

    The buck stops somewhere and that is with the banks!

    But lucky them... joe public now has to bail them out of this mess AND still suffer from the mortgage situation.

    You sometimes wonder if being unemployed and on benefits with council housing isnt too bad a deal than to face up with all the pains a working family has to put up with!

    As for our Bankers... well... they will just get their bonuses... maybe slightly smaller... some of them will get laid off... but they made the cash to live with the bit of time off from the pressures and strains of the financial world.

    Capitalism is so great isnt it!

  • Comment number 22.

    Thanks Robert.

    So what !

  • Comment number 23.

    to #4

    I too am an estate agent (in Ipswich).

    i would agree that prices are falling. I would agree that a 10% fall is about average ...if one ignores the market for flats.

    Flats in this town inparticular new dockside apartments have fallen 50 (fifty)% from their high of two years ago.

    But the particularly frightening thing is that the market as a whole terms of buyer enquiries and so sales has just stopped.

    Expect a further drop of 10-15% this year.

  • Comment number 24.

    I can't agree with your first paragraph. The reason for banks giving 100% + mortgages is in the hope of people defaulting down the line. Surely the banks make more on this and in a shorter time.

  • Comment number 25.

    ...well, you reep what you sow. we've had low interest rates and over-inflated prices for too long. whoever thought low interest rates would stay low forever...duh?? time to pay the piper!! in my day when i bought my first property tewnty years ago, i had to put down a twenty percent deposit and was allowed to borrow more than three time my salary. then when everybody around me harped on about negative equity (which to me is all relative, my property de-values-yout ppty devalues), i seemed to be secure, not that i was worried because i had no intention to sell and buy. the problem was the soaring interest rates. anyway, if y took out the 100% mortgage andthought interest rates would stay low forever, you need a strong cup of coffee. it's not our RIGHT to own a property, we must earn it. firt tme buyers that harped on about "i can't get on the property ladder..." well now's your chance but oops, you never SAVED any money (remember that 20% deposit) but went out and bought flat screen televisions and all of the rest.

    as for the banks, they should get themselves out of their own greed!! why should prudent "HOME", (not property) owners bail them out. gambling with your HOME can make you HOMELESS!!


  • Comment number 26.

    For the love of God will you give it a rest.

    5 straight years of doom and gloom in the press about a housing bubble. Now we finally have a mild price correction and a long overdue tightening of lending criteria and you're again busy predicting the end of the world. I assume you're a bright guy, so get some perspective. And incidentally, if you want to write about the actions of any industry leading to a self-fulfilling prophecy then you need look no further than your own doorstep for inspiration.

  • Comment number 27.

    Sorry Robert, but your analysis of how the housing market may overshoot going downwards is too over-simplistic. And, as a result, I don't agree with your argument that buyers have the power to "demand a 10% reduction" on an already reduced asking price. That's because you've ignored the impact that an economy with near-full employment has on people's house buying decisions. It's my argument that, unless we now see sharply rising unemployment which causes many existing home-owners to default on their mortgages, we are not going to see sharply falling house prices (though, in the current climate, a moderate fall of between 5%-10% is possible).

    Here are some reasons why your analysis is flawed:

    1) People who are in employment and holding off from buying in anticipation of price-falls will rent. This helps the army of landlords out there who, latest reports indicate, are saying that rental yields are rising. So there is no incentive for landlords to dump property on the market, thus keeping overall house prices supported.

    2) You correctly say sellers can refuse to accept a lower price on their property - in other words, a "stand-off" occurs between sellers who have no economic incentive to reduce prices and buyers who are holding off in anticipation of price-falls. Provided that sellers have no economic incentive to dump property (e.g. because of defaulting on loans through unemployment), it will be buyers who "blink first" as they gradually realise that they can not force the desired discount from the seller.

    Readers of this blog who are anticipating sharp house price falls similar to the early 1990s should remember that there were two very definite economic shocks occurred to the UK back then which caused that crash - interest rates doubled in 1989 from 7% to 15%, and unemployment subsequently rose from 6% to 11% of the workforce. Nine months into the 2007/08 "credit crunch", interest rates haven't doubled (despite the high street banks' best efforts to avoid passing on the base rate cuts), and latest employment figures show that unemployment continues to fall, not rise. Whilst I accept that demand for mortgages will undoubtedly fall causing a moderate fall in house prices as the market adjusts to this immediate new dynamic, long-term, I see a big stand-off occurring between sellers and buyers, with the net result that prices do not fall very far.

  • Comment number 28.

    There are lots of houses I've seen where you could knock 50% off the asking price and they'd still be a joke.

  • Comment number 29.

    As a mid 20s professional who is still renting I imagine I am typical first time buyer material. However, like many of my peers I wonder why I should buy now when it is obvious that house prices are on the slide. If I wait for a while I will have a bigger deposit, a better income and cheaper property prices. If all would-be first time buyers are thinking this way who is to say that the market for cheaper properties won't plummet?

    Does anyone think that more expensive (high end) properties might keep their price better?

  • Comment number 30.

    I'm an IT contractor. I earn £36 per hour. Ten years ago the rate for my skillset was the same, but then you could buy a farmhouse for the price of a semi detached today.

    My house is "worth" about £265,000 with a mortgage of £180,000.

    I want a bigger place with a garden so my kids - who have come along in the past ten years - can play. But thanks to the ridiculous house price inflation, and the absence of inflation in my rate, this is presently impossible.

    I would just love to see *at least* 30 percent come off house prices. I'm sure I'm not alone in that. Rampant house price inflation serves very few, and there are aspects of this credit crunch which may indeed prove beneficial.

  • Comment number 31.

    The banks are the only people who have a real insight into the market because they know how many borrowers are having problems with payments. They also know that they lent large amounts on self certified income declarations - possible to save admin costs!.
    The average family has had no choice but to buy into the property market and hope that incomes would rise This has enabled them to use a 're-mortgage' ever few years as a 'get out of jail free card' to pay off credit cards and to replace washing machines, etc. Now, with rising fuel, council tax and food costs, following hard on the heals of years of stagnant wages, we find we have a problem.
    Once again it’s the low paid who will l loose their homes.
    It would make sense to re-introduce the PAYE mortgage tax relief. (I think then, the relief was on the first 30K of a mortgage) This would help the low paid and as a spin off would be a counter to the criticism over the effect of the abolition of the 10p tax rate. It would also help first time buyers.

  • Comment number 32.

    what a disaster for everyone. at first i will benefit from a price crash because i am about to try to buy a place, but i feel really bad for the people who have just bought at overinflated prices.

    you might criticise them for overstretching themselves in the first place, but who can blame them when it just seemed like the ladder was being lifted relentlessly. many of those that are suffering will be ordinary workers, perhaps ones with less financial understanding, who supply all of us with other essential services. a stressed out and insecure population is an unproductive one, and when that happens then we all suffer.

    so what caused this problem in the first place? a big factor is the use of the housing market as an investment vehicle. its partly the same reason that food prices are shooting up. when it comes to important reources like land and food, we simply cannot allow speculators to use them as investments. there has to be a way to stop this.

  • Comment number 33.

    Why can't politicians see sense?

    They love us at election time and seem to think we're invisible the rest of the time !

    The current housing / financial problems have everyone worried ! but why is it that our political leaders can't see what really needs to be done ?

    If the problems stem from the USA and ,when you filter it down to grass roots level, from individual mortgage brokers selling unsuitable, and i would ague non-viable, mortgages to people who really couldn't afford a mortgage, then surely it would be a fairly straightforward matter to trace back through the paper trail and find those individuals and company's responsible for this mess and make them cough up or at the very least bar them from ever working in the financial sector again !

    As to what can be done now - if our political leaders really want to help get things back on a more even keel then here are a few ideas of my own..

    1) cut fuel duty - knocking off 50p a litre would certainly help ! this would reduce the transportation costs associated with food and almost every other consumer product you see in stores, this should be passed on to the consumer and therefore ease inflation.

    2) cut interest rates - but buy a sensible amount say 1 - 2 percent to help stimulate investment.

    3) levy an import duty on foreign goods to give our own hard pressed manufacturers a chance to recover

    4) put in place a system of tax breaks to allow the creation of a new manufacturing base for the UK - it's not that long ago that we manufactured most of the goods we now import. people argue that its cheeper to import than to manufacturer here in the UK but that's only true if you allow imports in without any checks and balances ie: are the goods also made in the UK ? if so then apply an import duty to the goods coming in. This would also make the UK a good place to come and set up for manufacturing industry.

    5) Control the number of migrant workers arriving in this country - this should ease the burden on the countrys infrastructure, healthcare, schools,housing etc

    In short if we can make it or grow it - we only need to import enough to meet demand and take up the slack in supply. Not as it appears import everything and make or grow here to take up the slack !

    But then again what do i know - I'm not a politician !

  • Comment number 34.

    Why are British Taxpayers paying the price for poor regulation, failed parliamentary oversight, and downright bad management on the part of the banks...

    Who was it that said 'Banks privatize their profits, and socialise their losses' ?

    I say LET THEM FAIL !!!

    The basis of a capitalist economy is that the strong (and well managed) prosper, and weak get bought out or disappear once the idiots who gambled too much with their clients money are on the way to jail...

    So, the next time a bank gets into the type of problems that Northern Rock got into, I would prefer that the Treasury just prosecutes the directors, and lets the bank go to the wall ...

    And as for the savers, well, they should spread their money around, invest in property, and Government debt rather than exceed the £30,000 limit imposed under the Governments insurance scheme...


  • Comment number 35.

    Once again Robert Peston tries to make the news instead or just reporting the news. He does more damage to the industry than any credit crunch. Taxi for Peston

  • Comment number 36.

    100 per cent mortgages should never be the norm. They give the buyer no material interest in the transaction. If buyers have to save a significant deposit then it shows they are prudent and capable of putting money aside.

    It is the profligacy of the banks in lending up to and even over the price of the property which has fuelled the inflation of house prices to such a ridiculous multiple of average earnings.

    While banks were pumping in unlimited amounts of cash, sellers were able to ask unrealistic prices. And buyers were able to purchase an inflating asset without worrying about the price, knowing it would be "worth" even more in a year's time.

    So the banks inflated this particular bubble. Rather than trying to return to the days of profligate lending, the environment of lower loan-to-value mortgages should be applauded as a sensible norm. If property prices are lower, then lenders won't need to raise so much finance to provide mortgages for them.

  • Comment number 37.

    As a Mortgage Adviser i find it astounding that people in influential positions such as M.P.s and Mervyn King make sweeping remarks regarding 100% mortgages.

    I believe for the right type of client there is a valid place in the market for 100% mortgages and even for 120% mortgages as previously provided by lenders such as Northern rock.

    Where the problem lies is not in the Loan-to-Value of these products but in the underlying affordability calculations.

    We are currently in a position where a man earning £50000 p.a. cannot borrow £100,000 on a property if he has no deposit, yet he can easily borrow £250000 on a property if he has a 5% deposit, this is clearly not logical.

    Also thanks to the negative press surrounding 100%+ mortgages there are now many clients who previously took advantage of these deals coming to the end of their initial term with nowhere to go...

  • Comment number 38.

    I think it is wrong for the estate agent to think things will level off after a neat and tidy 10% fall.

    In the next month or 2 the Haliwide indexes will go year on year negative. This will cause "panic" among the property vested interests and will make anyone thinking of buying pause for thought.

    There are a lot of people out there who have been waiting for prices to fall for some time and will be looking to exploit the situation to get prices right down.

    On the way up it was dog eat dog and it will be the same on the way down.

  • Comment number 39.

    The price of property has dropped, mainly for the poor quality ones. It is rather naive and simplistic to assume many of the points raised by Mr Preston. Try finding a really nice flat in central London at a knockdown price, it is not happening.

  • Comment number 40.

    Londonrugbyboy (27), Alleleuiah, some common sense. See you at Twickers.

    My last post seems to have been lost, so at risk of repeating myself;

    Your estimate of c.£300bn losses is plainly ridiculous.

    In the last recession c.250,000 homes were repossessed (1989-1993) out of 10 million mortgaged properties. If that were repeated this time round (very unlikely because of the employment and interest rate environment), a very conservative view of the possible losses might be 300,000 @ £200K @ 30% loss rate (your number) = £18 billion. That might see off a few of the marginal and cowboy lenders (pheww!), but it would not be the end of the world for the rest. (Actually it might be doing them a favour - bigger market share and higher margins).

    Let’s say a 20% fall does happen, though. (Unlikely, in my view, mainly for the reasons Londorugbyboy put forward, but certainly possible). That would imply rental yields of 7.5%+ against interest rates of almost certainly 5% or less. Those are very attractive economics, particularly if you think you are investing at or near the bottom of the market. It would also bring house prices down from 5.5x earnings (Halifax no.) to below 4.5x earnings. Much more affordable, particularly if you factor in lower interest rates. (Irrespective of inflation this would happen in that scenario – Gordon could not live with the political or short-term economic consequences of not reducing interest rates).

    No. 12
    You quote 3.5x earnings as some kind of gospel average sustainable price figure. It is a nonsense number (even if a correct average) as it takes no account of prevailing or likely future interest rates. It would imply a fall of 30-40% from where we are now. If you are waiting for a fall of this quantum you will be waiting forever, whatever Davies, Bootle and the other worshippers of the HPER Graph say.

    For anyone wishing to do a bit more rudimentary research before posting (including Mr. Peston), you could do worse than look at the “economic factbook” on the research part of HBoS website. This is slightly out-of-date but you can find more recent data in other areas of the site or on the sources they quote.

    It gives all you might need on house prices, affordability, household wealth (particularly interesting), reposssessions, interest rates etc.

    If anyone else knows some good sources of economic data and analysis, suggestions gratefully received.

  • Comment number 41.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 42.

    I suppose I am a believer of the Chaos Theory, or what goes up must come down, the market having been over hyped will inevitably crash. I personally think that the lenders involved in shuvelling money at people are squarly to blame, you can't blame the punters for panicking, trying to get on the housing ladder with grim warnings of ' you'll never be able to afford a home', But banks should have known better, surely senior bankers knew full well and remember what happened in the 90's. but seem to have enjoyed playing a financially deadly game of 'pass the parcel' I seriously think the likes of NR 'miss sold' mortgages especially 100+ X huge salary multiples. And it will be interesting to see if some of the losers involved will try to sue. I dont think the doom and gloom brigade make the problem worse by talking things down and being blamed for that. I believe the problem is out there and about to avalanche into a worse situation than the 90's. I blame who ever it was who deregulated the banks and building societies, so that they could compete and now look what has happened.

  • Comment number 43.

    At last some fresh spring air news on the housing front.

    The illusions have to pop before the asset bubbles can. And it looks like the former has finally happened.

    The price obesity is still there but if you are right, Robert, about the change in attitude, then I think people will apply the necessary self-discipline and we will avoid a serious depression.

    For those not financially stretched, hopefully they will stay out of the property and share market gambling halls, and run down their outstanding debt as fast as reasonably possible. This will avoid further fuelling the madness.

    For those without assets, they should purge their minds of those bizarre thoughts about trying to get on the housing ladder. Instead they should keep combined housing and transport costs to no more than x percent of after-tax, rent until house prices reach sane levels, and only go for fixed-rate medium-term mortgages when they do buy.

    It is verging on fraud to claim that long-term property prices appreciate at much more than the increase in real GDP. So forget buy to flip.

    If you find yourself tempted, stop reading those ghastly week-end advertising supplements in the broadsheets on gambling in property and shares. Every now and then, read the book by Mr. Bootle.

    For those stuck in the middle, being forced to sell, and under water already, it will be tough. Perhaps they might need to take a second or third job for the next several years. Same goes for baby boomers. They may have released so-called equity in their homes, and pension funds will gets worse once the share market corrects, but those were never really assets in the first place, only illusions sold on commission.

    Politicians will really squeal. They always push the go-go button to keep consumer spending high, to serve their own self-important ends. The party is definitely over, however. You do not want to be the last to leave.

    Incidentally, because of Mr King, the banking system will not collapse now. Bank shareholders are going to chip in more and more money, most of which they will lose, as the banking sector shrinks. The more that bank shareholders put in, the less the taxpayer will have to fork out when picking up the pieces in 2012.

    None of this is predicting the future, of course. We can leave that to the financial shamans. This is simply describing ways of dealing with the financial tsunami which has already broken.

  • Comment number 44.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 45.

    If you look at the Communities and Local Government web site they publish figures on mortgage payments as a % of income. Long term this is around 17% for all buyers and 18% for first time buyers. In 1990 it was 27% for both groups but in 2007 it was 21% for all buyers and 23.5% for first time buyers. if prices have dropped by 10% and incomes rise by 4% over a year then the figures would be 20.5% for first time buyers and 18% for all buyers. One more year of income growth with no further house price falls would restore both ratios to around their long term average.

    Of course rising energy, food and other costs will continue to have an effect but so will the shortage of housing supply over the medium term.

    If house prices are to continue to fall beyond 10% there must be other reasons at work perhaps including the media itself?

  • Comment number 46.

    nobody can predict the future,you may as well ask mystic meg, the news is supposed to report the past,not the future

  • Comment number 47.

    The pyramid scheme has finally collapsed,
    and nothing can stop housing prices returning to their long-term historical levels (roughly 4 times median household income)

    This would suggest a drop in prices of around 40%, unless incomes suddenly increase, which of course is not going to happen.

    The last ten years of easy credit has created
    a lot of phoney wealth. This largely unearned prosperity is now evaporating to
    money heaven.

    The Govt will doubtless fritter away a lot of
    money in attempted bail-outs just as the US is doing to so little effect, but this will
    only delay the inevitable momentarily.

    The FIRE economy does not work.

  • Comment number 48.

    The price of a 2 bedroomed cottage where I live is currently £125,000+

    If a couple want to buy a house together they need to find at least £12,000 as a deposit? Holy moly - that'll take some saving!!

  • Comment number 49.

    Actually a better story might be that this problem has been caused by irresponsible reporting, which created the first run on a UK bank for over 100 years, reducing the supply of funds to the market, which in turn started a crash in house prices.

    Maybe there should be ASBOs on reporters?

  • Comment number 50.

    Am I the only person in the country who's wondering why house prices and their continual rise are so important to the economy?
    I'm sure that for the vast majority of us buying a house is simply buying somewhere to live. We're not speculating. All that we need to know is that as our families grow so we will be able to afford the step up to the next house. That is something you could generally rely on to happen in the past when I started on the first rung of this so-called 'property ladder'.
    As I see it the whole system has been destroyed by the frantic rush of greedy mortgage lenders to provide bigger and bigger loans, enticing people into bigger and bigger debt, and fuelling the frenzy of property speculators into pumping prices higher and higher - ultimately well out of the reach of prospective new buyers. Surely it must also contribute to wage inflation.
    The sooner a cap is put on this and lenders (and borrowers) are forced to act more responsibly the better.

  • Comment number 51.

    Not so long ago (25 years) you had to pay some deposit and although it may have mean't tapping your parents for a few hundred quid it encouraged borrowers to be more responsible.
    In the last few years people have gone mad on borrowing, without restraint. Naturally, prices have risen unreasonably in response to this unreasonable behaviour. When people borrow reasonably, prices will become more reasonable, ie drop by around 30%, before greedy lenders under an irresponsible governement start the whole thing over again. Pessimist or realist - you decide.

  • Comment number 52.

    Not an original thought but it seems that lenders looking after No1 by restricting lending to 80%/90% LTV. Are affordability limits being similarly increased I wonder?

  • Comment number 53.

    Robert Preston is quite right in his analysis however the area of the property market where falls could be even more severe is buy-to-let. In this market a number of lenders have announced they are not prepared to lend. Some owners, who bought before 2000, will be sellers because they wish to take their profits and move on. Others will be sellers because the rent doesn't cover the finance costs and others because they cannot refinance. It is difficult to see why anyone would be a buyer at anything close to current prices time given this background. Looking at the new build statistics over the last 4 years there are maybe 500,000 units that will have to be sold. To shift this stock prices are going to fall a long way, say 50%. Total lending in this area according to Council of Mortgage Lenders is £100 billion, if things get really bad the lenders may have to write off £5/£10 billion. Those who say a fall in value of this magnitute is impossible should note that in Hong Kong post 1997 the value of the bog standard appartment fell by 75% over the next 3 years. As they say " you ain't seen nothing yet"

  • Comment number 54.


    In Japan in the 1990s, after their property bubble burst, the stand-off between buyers and sellers lasted 10 years. And that was in a country where people had savings.

    House prices fell 30% over a decade.

    In the UK, savings ratios are far lower (partly because of the unsustainable cost of servicing mortgages on hugely expensive houses). Real wages have been falling for years, so buyers will take longer to save deposits.

    Sellers have no savings to tide them over in the coming downturn in employment, so many will have to sell into a market that's standing back with its arms folded waiting for another 10% fall in deal prices.

    Prices will fall 25%-30% from their peak. If employment holds up (unlikely), it'll take a long time. If the economy tips into stagflation (increasingly likely), it'll happen quickly.

    UK house prices tend to follow the rule that what goes up like a rocket comes down like a stick.

  • Comment number 55.

    Stop talking us into a recession.

    Prices need to come down - hyper price inflation over the last few years is utterly unsustainable, so a price correction is nothing but a good thing. True, some who had 100% (or greater) mortgages will have a problem, but not in the vast numbers of previous recessions, but a general price reduction will mean that people can actually afford to buy houses.

    What if the banks learn not to lend silly amounts to people who can't afford it? How can that be bad?

    Everyone feels nervous enough at the moment without the font of all knowledge (the Beeb) telling us the end of the world is nigh. It isn't, so please stop saying that it is.

  • Comment number 56.

    I think you are right - but not for the reason you state.

    Once upon a time there was no such thing as a 100% mortgage, but people didn't think that putting down a deposit meant the banks/building societies all expected house prices to fall by the amount of the deposit.

    The reason for the deposit, apart from proving that you were a solid, financially responsible citizen, was that if there were ever a repossession, you would already be quite a lot in arrears, plus there's the costs of getting a property back - and 10% or maybe more of even a stable value could be used up that way.

    The reason taking away 100% mortgages will cut prices is simply because buyers can't borrow so much. That and prevailing psychology that says prices will fall and therefore I had better get a discount to allow for that.

    Prices will continue to fall until people start to think there are bargains to be had AND have the money to buy them. This can take a long time. People forget that the crash that started in 1989 didn't end for over 5 years. But we never know what will happen next - I still have a newspaper article from 1995 giving lots of learned reasons why house prices would remain depressed for another 20 years!

  • Comment number 57.

    No. 12
    Sorry - to answer your question;

    There is c.£3.7 trillion of housing wealth in the UK and c.£1.2 trillion of mortgage debt.

    There is c.$22 trillion of housing wealth in the US and c.$11 trillion of mortgage debt.

    As well as the HBoS site, try for UK mortgage data and for more data and analysis on th US housing market than you can shake a stick at.

  • Comment number 58.

    No. 43
    You have some sage advice, much of which I would not diasgree with.

    But that book you recommend, is it by the same Mr. Bootle who has been predicting a house price crash every year since 2001, based almost entirely on the house price to earnings ratio? Is that the same index that ignores interest rates and availability of credit?

    The newly recapitalised banks will be sitting pretty.

    And my mortgage free home is no illusion, whatever its vlaue.

  • Comment number 59.


    Top comment!

    #37 wrote:

    "Also thanks to the negative press surrounding 100%+ mortgages there are now many clients who previously took advantage of these deals coming to the end of their initial term with nowhere to go..."

    Oh those naughty journalists writing nasty words! The reason for 100% mortgages drying up couldn't possibly be because the banks are being flayed alive by the consequences of their own lending madness (of which 100+% mortgages were an intrinsic part) could it?

    High loan-to-value ratios drive higher house prices, which require more high LTV loans and so on until lenders have to accommodate any first time buyer who can fog a mirror in order to keep the bubble inflating.

    Then you run out of foolish/desperate first time buyers and 'pop.'

  • Comment number 60.

    Personally I am fed up of all this doom and gloom. Before the Northern Rock I had never heard of Robert Peston. Now he is never off my screen spouting doom and gloom. What are Robert's credentials that make him the sage of the BBC on the British economy. We msut be careful not to talkourselves into a recesion. At teh end of the day, banks will mend their balance sheets the general economic conditions are reasonable. Can we have a more balanced approach to reporting please, which is what I expect form the BBC (although decreasingly so of late).

  • Comment number 61.

    This just proves that higher house prices were being driven by the banks lending money to push them higher. A classic asset bubble!

    Now the banks offer less and the prices go down. What a surprise!

    This could and should have happened sooner if we had regulators worthy of the name and a proper measure of inflation that took in housing costs.

    Now a lot of people who got drawn in because they simply needed somewhere to live are going to have to pay the price.

    The political fall-out from this is going to be interesting to watch.

  • Comment number 62.

    What we are looking at is a 25-30 per-cent drop over two years for housing, and 40-50 per-cent drop for flats over about the same period.

    This will actually be no bad thing in the longer term and should dispose of the stupid buy-to-let 'investment' bubble, in order that the real economy can receive some much needed attention.

    But silly interference by politicos provides a disturbing 'wild-card' in all this. They are so obsessed by their own short-term electoral cycle that they may panic and make matters much worse.

    There will continue to be a serious problem with the 'off balance sheet ' world. There are so many nasties lurking there that it is unpleasant to even think about: CDOs, Credit Default Swaps (eek), Insurers, etc.

    The present attitude seems to be; just sit tight and things will sort themselves out in the end. We'll see!

  • Comment number 63.

    I agree that there has been a collective bout of madness in the property market. The reversion to a sensible regime of lending money only after a material deposit has been accumulated however, while belated, is an unambiguously sensible development.

    By building up a suitable deposit the borrower has demonstrated to a lender that they can manage their income to a degree whereby they are equipped to deal with the financial turbulence that will inevitably occur several times in the course of a 25 year mortgage commitment. The Lender in question will also be more inclined' both morally and practically, to assist such a borrower when general economic difficulties and personal ill fortune coincide.

    Mortgages of 100% and 125% are the offspring of a culture that says "a property is mine by right". In reality, successful property ownership is the result of hard work, diligence and sacrifice.

    I apologise for the tone of sanctimony in this opinion but I suspect that the residential property market is about to learn the value of these fundamental principles of lemding.

  • Comment number 64.

    Human nature dictates that 'it can't happen here' mindsets predominate. House prices are falling as you point Robert, the additional factor here is that the falls tend to exhibit geographical differentials. This was acutely brought into focus during the early years of Mrs Thatcher's regime where older industrailised regions suffered dramaitic falls in average house prices. Factor weakened business sentiment, reduced employment and shrinking consumption and the negative equity 'market' begins to look very negative. I recall a collegaue at the time buying a house in Oxford during the mini-property boom of thel ate eighties. Astonishing price. When his buiness folded 18 months later, the sale price of the house was 25% less than the his purchase price. The problem at moment is that the thin capital lending model purused by the banks was also adopted by the purchasers who came to deals with relatively little of their own money at risk. Because of this fact, the fall in prices will be greater since the actual purchaser acquired capital in their hands and in bricks and mortar in the houses is very low.

  • Comment number 65.

    A couple of comments:-

    1)' that homeowners, and not banks, would be exposed to the first 10 percentage points of any market fall..' - The banks and building societies have never been subject to the first 25% of any loan. They insist that the lender take out an indemnity insurance and even then the borrower will be persued by the insurer if the lender claims on this insurance.

    2) Why is that the media so often reports house price inflation as a good thing? For most of the house owning population, inflation increases the costs of moving house, the differential between current and new property is greater, stamp duty is more, and often professional fees are a percentage. Therefore any fall in prices will be good for people moving house and for first time buyers, all in all this will be good for the property market

  • Comment number 66.

    This is a great day for those who have kept their cash, lived in a tiny house, and waited for the crunch. That lot are hoping for a 40% drop, but 30% would be enough to release the grasp on their cash.

  • Comment number 67.

    Robert Peston, I think that your analysis of the economic situation and the various associated drivers is spot on, and that you are a fine journalist. But why do you have to deliver your spoken commentary in such an annoying, clearly affected manner of speaking? It is almost a parody of the type. You never used to speak that way, why do you do it now? It completely detracts from the message that you are trying to convey. Please speak normally, or at least as close to normally as television will allow!

  • Comment number 68.

    Mr Preston is not half becoming tedious on the bank situation. Change the record please. It's like your little sister playing Take That records over and over and over again. Eventually your sister will move on to something new though. Let's all buy some record tokens for Mr Preson.

  • Comment number 69.

    Oh yes, and whilst Mr. Peston would have us all believe that the housing market was built entirely on 100% mortgages at massive multiples, that is not what the evidence says.

    FTB stats for last 3 years were £135bn lent @ 90% @ 3.2x earnings. Average interest cost c17% of salary. (CML website). Interest costs will have gone up with rates, but incomes and values will also have risen.

    Makes the "analysis" a bit redundant if most people already put down 10% or more as a deposit. (Which they do). Sure it will have an impact at the margins, but let's not overdo it.

    BTW, over a third of all homes have no mortgage attached. These are owned by the parents or grand-parents of those struggling to get on the housing ladder. They are generally well able to subsidise their loved ones with their "illusory" wealth. Reasonable Deposits are both desirable and available, just like the old days.

  • Comment number 70.

    Seems to me that the premis of this comment is that every house buyer will require a is 100% mortgage which most unlikely to be the case. Additionally as the lenders have been severely criticised for granting 100% mortgages it is a bit ott to pan them for declining to continue to do so.

    Consider views expressed are over pessismistic

  • Comment number 71.

    Robert, Your maths are rubbish! reducing the asking price a of a house does nothing special for the purchaser who is being asked to provide a % of the selling price. (10% of 180,000 is £18,000, 10% of 90% of 180,000 is £16,200). OK £1,800 is good, but it won't make any difference if you can't afford £16,200.

    House prices are supply and demand driven - if buyers can't get the funds together the price has to fall, the 10% or 20% deposit is irrelevant until the buyers can afford the house. It may be that 10% deposits force prices down - but not because of a series of 10% cuts by sellers, simply because buyers can't afford to raise the deposit.

  • Comment number 72.

    You're all wildly off lol. Barking up the wrong tree, arguing about how much it will be, how quicky, so first time buyers can jump on the merrygoround again and everything will be hunky dory. It won't, those days are gone.

    Most of you are taking numbers to suit and ignoring others. House prices relative, yes, until you need to sell, like if your job moves from London to Scotland, it's long term and the children are about at school changing age. Those are the people stuffed. And it will get worse as China and India's economies grow, and bad news boys, not only do they have the manufacturing, they don't need your services, they can do it themselves (put men in space), they are quit educated.

    While the Blair/Brown disaster (who got the country in this mess?) continues with faffing on carbon credits, and tinkering without proper evidence, which every new study shows does not fit global warming (Larsen B Ice shelf, Atlantic thermocline, Antarctica temps etc etc) and raging over biofuel, they'll be off the ball again. Yoiu've all fallen for that "solid fundamentals" malarky that they spout, hoping if they say it enough you'll believe, and you are.

    Talk us into recession? You ARE in recession. I live in France now, but I can't believe my fellow Europhobic Brits have forgotten something they carped on about. Remember when France and other Eurozone countries weren't meeting the inflation targets, they were at 2.5 or 3% (UK too remember?), so they got together and recalculated, and magically over night it halved to 1.5%? That means, compared to the 90s, our true inflation is around double, ie 4.5 to 5%, not 2.5%. That helps explain some proper rising prices, which are now fiddled out. Oh dear. If GDP growth is now only 1.6%, but inflation 3 times that, well, that's a recession boys.

    Those silly income % numbers. Oh right, people are paying less of their income? How come they can't get on the housing ladder then? Those numbers are fiddled too. Yes, rates are lower, but not any more, mortgage rates are rising despite BoE cuts, and that didn't happen in the 90s either. If house prices were rising by 10 or 20% a year, how can you pay less for them when wages go up by 4%? That's what the problem is, and the banks responded by 40 year terms, 100%+ mortgages, insane couple multipliers of 5 times joint salary. That didn't happen in the 90s either.

    Bank run the fault of the media? No, the people taking it out knew it was unsafe, they are not as stupid as the "experts" think. They knew house prices were overvalued, they knew everyone was livng on credit. How did a simple bank run, which was what? £6bn in withdrawals over 2 weeks end up at a £55bn taxpayer committment.

    @57, your numbers are important. £3.7 trillion of house "wealth". £1.2 trillion of debt. If the value drops by 30%, that will be £2.4 trillion wealth, but the debt won't drop, it will still be £1.2 trillion. That makes quite a difference eh? People are whinging about saving £10K for a deposit. How long will it take to claw that "wealth" drop back? And don't forget credit cards, loans, and the other £1 trillion of debt. That will make almost zero net wealth, apart from the residual value on those cars and flat screen TVs lol.

    And those remortgage opportunities to pay it all off are gone. People have already released equity, they will be in trouble, as the interest only people who never took out a capital repayment loan, those whose pensions Uncle Gordon evaporated. All those will hit the market between now and the next ten years.

    None of that applied in the 90s either. But even more to come. Yes, look at those bad press reports of the mid 90s, forecasting a bleak future. Well, people said from 1998 prices were too high and were going to crash, yes? Didn't happen. Why? Well, there was a stock market crash, remember, people went into property, kept demand. That was aided by the more liberal lending conditions. But then we had Buy To Let, and the frenzy of that. So some people are way more exposed than in the 90s, bouncing mortgages off each other on paper wealth.

    And finally immigration, which we've just learnt was way higher than we thought, but now the government is cutting back on. Those factors created extra and unusual demand over the last decade, and those are now gone. Face facts, it will be a long hard drop.

    Remember what happened. Remember they massage the figures. From the Sunday Times (old not last week's lol) while Blair was bleating on about unemployment stable at 1m or so, it was revealed they had added 370K to the long term disability numbers from the unemployed, and had created 125K extra public sector jobs a YEAR for 6 years. By my calculations, the true unemployment rate then would have been closer to 3m not static lol. They did the same with inflation. One month about 3-4 years ago, the Haliwide figures varied by 9%! Those numbers are a pile of crock, just guestimates on bad science and stats. Use the Land Registry numbers. Might be 3 months old, but they are accurate.

    If I recall correctly, average negative equity in the 90s was about £9K each, 8% of property. If it goes down by 30%, and why not, there are no solid fundamentals are there, and the growth is going to be Asia's not ours or the US lol, on 200K average, that will be £60K, and if you have a Buy To Let, may be twice that or more, even higher if you bought flats for students etc lol. Welcome to the poor house.

    Now how can anyone think this is not worse than the 90s?

  • Comment number 73.

    Oh, and I forgot to add, is how can you have faith in Brown or Darling, when they can't seem to see that the 10p tax malarky is going to make single people - those with the highest disposable income (married with kids have, well the kids and the mortgage lol) - worse off, and will hardly be a stimulant, but a further drag on the economy lol.

  • Comment number 74.

    The only thing which is clear, is past performance (or past disasters) are not necessarily an indicator of the future trend. Just because in the early 90s there was a House price crash, mostly in the South i think, it doesn't mean the same level will happen again. It could be worse, or it could be better (depending on which way you look at it). Secondly, this time around there will be less forced sales through job losses and past lessons about negative equity and repossessions have been learnt one hopes, so there will be less hasty decisions in both those areas, therefore I would be very surprised if over two years there is anything more than 20% drops from the peak (July 2007). I think if people are waiting on the sidelines, they could end up getting stung by disappointing (for them) benign falls in price in prime areas. Forget city centre flats for evidence of a widespread crash - they are a different beast and they won't have an effect on standard owner occupier markets. The press have been so gloomy they could end up with red faces if the crash they are willing does not happen. It almost seems they have a vested interest in it now, because they want to save face. I would say, let the markets sort themselves out and stop willing it one way or another.

  • Comment number 75.

    Mr Peston so loves depressing the whole country. I really do believe that his initial "outing" of the Northern Rock problem resulted in widespread panic and far greater impact than was neccesary.

    I think he should be arrested under the anti-terrorism laws - is he in the pay of Mr Bin-Laden?

  • Comment number 76.

    To number 60 (et al) - if you think Peston is the only person suggesting a gloomy opinion, then please continue to not read any financial press or follow what is going on in the world, and please enjoy your happy little isolated world.

    The fact is, the economy is totally up the creek, to the extent that I consider Peston's comments very very mild.

  • Comment number 77.

    great article.

    agree with #34 - let the banks fail.

  • Comment number 78.


    There are several factors that you have omitted from your analysis:-

    1) The current cost of living climb, the government's inflation figures are ridiculous, with energy and food prices doubling (in some cases more) in the last two years. 2.5% my backside!!!!

    2) The inflationary impact of the £50billion+ BoE liquidity release scheme, that will devalue the pound even further than the already decreasing overseas investment in the UK due to the consensus of international opinion that the risk in the UK economy is too high.

    3) The IMF's 30% overvaluation figure of the UK housing market and the 30% haircut applied to the BoE's terms for their liquidity release scheme, which indicates that they agree with the IMF.

    4) The fact that unsold property stock on agency books is at its highest in almost 10 years.

    5) Mortgage approval rates for house purchases has fallen by almost 50% in a year.

    6) There is greater supply than demand within the current property market, which dictates that prices will continue to fall.

    7) The banks have already agreed that they will not release the stranglehold on mortgage lending as the market is too much of a risk at the moment, which confirms that demand within the property market will be kept low due to the finite limits of lending criteria for mortgages.

    8) The Rics survey illustrated that the number of surveyors reporting a fall than rise in house prices was 78.5%, the highest since records began in 1978.

    9) The variant circumstances that you refer to between now and the 1990's crash (interest rates and employment) are more than countered by the most serious truly global financial crisis that there has ever been, and your confidence in the fact that employment will continue to fall, in my opinion, is misplaced. The financial sector alone will cull many thousands of jobs within the next 3 months.

    While I stop short of agreeing that there will be a 30%- 40% crash, I believe that your 10% buyer - seller standoff will not happen. If it does, proces will continue to fall in the meantime, as those that simply must sell, will continue to undercut those who can afford to wait, driving the price down.

    The mere fact that obtaining a mortgage now is difficult, and more importantly, expensive. When a potential buyer manages to secure a mortgage offer, they will simply pass the additional cost on within their offer for property, knowing that seller's are having to compete for the buyer's interest. The simple economic law of supply and demand.

  • Comment number 79.


    Although I do not necessarily agree with your points, I do appreciate the logic behind your conclusions.

    I genuinely believe that the position in which we find ourselves on an individual basis does contribute significantly to our 'take' on the situation, and maybe our posts are as much wishful thinking as they are keen analytical insights.

    I, for one, welcome a strong house price correction, and maybe that sways my interpretation to believe that will happen...

    Who knows, but it is a genuine pleasure to read diverse opinions on the matter...

  • Comment number 80.

    Unless you are selling your house and getting out of the market the only thing you are worried about is the difference between the price of the house you are buying and the one you are selling. Given that this will normally be much less than the price of either house then for this to change by 20% is a lower impact.
    We have to get back to sensible lending policy and sensible credit management. The current situation means that people live on the edge of a financial knife and when small things go wrong they have large impacts.
    House prices should go down by 30% to get to a 'normal' level, looks like they are 1/3 of the way already and should overshoot as markets usually do.
    I predict a great housebuying environment in a few month time.

  • Comment number 81.

    #58 morebalanceplease, thanks for the feedback.

    Let me return to the book by Mr Bootle in a moment.

    You may agree that for someone with a mortgage, in practice, housing cost affordability can be calculated as a percentage of after-tax cash income. It means one does not have to speculate about interest rates. However, one should take out a medium-term fixed-rate mortgage to avoid being caught short by a sudden spike in rates.

    For the life of me, I have never understood why home owners with a mortgage speculate on interest rates. This is the result of not fixing their rate in advance. The pleasure they may be able to derive should their floating rate halve, is not a fraction of the pain they would suffer should it double. You and I know how easily and quickly that can happen.

    Apart from a fixed rate acting as insurance against interim fluctuations in mortgage interest payments, it removes control from the bank to unilaterally change the monthly payment.

    Now over the longer term interest rates do tend to fluctuate around the longer term average. If you use this average, the earnings multiple (house price to earnings ratio) is a useful metric for detecting at a macro level where house prices are out of line with the long-term trend. For example, there is no need to explicitly adjust for inflation as it is included in both your numerator and denominator.

    In other words, earnings multiple is a legitimate measure used by economists and, indeed, banks.

    So whether you use monthly cash flow or the earnings multiple depends on whose doing the calculation and its purpose.

    As far as defending Mr Bootle, no need. In his superb 2003 book he says that once the property market has come down to earth people will have to face the awful truth – no more money for nothing. It contains reams of facts, which should appeal to you, based on some of your other posts.

    Regarding your other points. Banks are entitled to create credit. As much as borrowers can bear. Now that borrowers have stopped believing the growth myth they have to look at carrying costs. They can borrow no more. Banks will not be sitting so pretty, as described in comment number 24 on the article Robert wrote yesterday called RBS rebuilds.

    Of course your mortgage-free home is no illusion! My comments were not relevant to that situation.

  • Comment number 82.

    bottom line. 1st time buyers are going to have to find on average in excess of 20k before they buy their house which they did not realise until last month. If the average rate of saving 20k is for example, one year then the time lag before the market becomes demand led again is 12 months. Of course the market may fall enough to reduce the amount of the 10% requirement to a manageable amount!

  • Comment number 83.

    to 57

    Do not be sorry, accept my thanks for doing the legwork for me.

    I have had a rummage around the Council of Mortgage Lenders figures and maybe the nature of the compilations says more about the organisation than it should. Never mind.

    However on the figures that you provide it does show that even in worst case assumptions we have 3.7 -1.2 of 'value' in the housing stock, or 2.5 tn. Even if we apply the 3.5 x figure (which incidentally appears to be higher than the current average of 3.3 given by the cml!)

    We should be OK on average. This, of course, hides all those who have purchased at high multiple on high loan to value ratios in recent years who could still be in deep do-do.

  • Comment number 84.

    My current house went on the market in 1989 at £110k.
    I bought it in 1991 for £80k.
    One year later it was worth £65k.
    Thats a 40% drop from the peak.
    Its likely to happen again.
    When the banks allow the price-to-salary multiples to get so far out of line (as they are at the moment) they risk disaster.
    You'd think they would have remembered the last collapse.
    Surely the government should have called in all the bank directors 3 years ago to discuss how to stop the ballooning debt bubble.
    Homeowners must revise their perceptions of what their house is worth.
    Tragically for many, its all too late now.
    Anyone remember Nick Leeson.
    He lost £800 million and got jailed for it.
    The current bank directors have lost 100 billion and rising, so what's in line for them?

  • Comment number 85.

    I think Robert Peston is actually being quite optimistic. Prices are falling by much more than the figures so far published suggest.

    Consumers have hardly begun to feel the real effect of the credit crunch, but when they do, retail sales of discretionary items like furniture, cars and luxury goods will fall sustantially, causing unemployment to rise. The building and banking sectors are already being affected, and Gordon Brown has already spent all the money in the war chest in the good years, leaving nothing for the lean ones.

    That will force many into arrears on their mortgages, and property prices will fall further. As for the flats that planners have encouraged - many have been sold to investors who cannot let them and will not be able to sell them. Many have never been occupied at all!

    Whilst my guess is that houses will fall by on average 30% from their peak before stabilising, flats will fall by much more than that especially in secondary lcations and if they have been built without car parking.

    Lots of cheap property will become available eventually, but there will be serious pain for many who bought with large mortgages at the top of the market

  • Comment number 86.

    Dear Sir,

    The copyright for my following information completely belongs to me (Gerrad Voon is the same as ProfoundWhiteKnight)

    New tie in to the Certification of Financial Institutions - by taking away the uncertanity for Interfinancial Institution financings of each other.

    April 21st, 2008

    Gerard Voon

    When a bank enters crisis with illiquidity from over exposure to sub prime, eg. overleveraged and not highly credit worthy clients and overly leveraged risky derivatives, they can enable other financial institutions (and government guarantees) to bail themselves out by opting for the certification process whereby their books are audited for anymore sub prime and/or derivatives exposure that might not have been accounted for to date (eliminating further future write downs). Therefore the financial institutions orchestrating the bail out can not only avoid downside risk almost completely and avoid losing their money, but are able to offer the same certainty over the long run to investors who see the value in the undervalued bank (being bailed out) that when crisis hits usually causes an undue panic/fear selling in bank stock shares (corporate bonds where applicable) and deposit withdrawals that far exceeds the rational investment reactions (irrational sentiment). Once certified any and all investors/depositors can invest in banks that have no sub prime/derivatives time bomb (GV GP) that will hit the investors/depositors in the future. Furthermore the government can guarantee the debts (perhaps 30% which is a common debt to equity ratio in the real estate industry) the aim is to buy time (while keeping the weak parts of the economy stable) until the the economy rises again without actually spending or subsidizing the money away. Those banks that voluntarily opt for certification are basically putting on paper that that they can put behind this fiasco/headache and get back to doing business.

    April 4th, 2008

    Gerard Voon

    The Economy

    If stock market prices (including real estate - housing) growth are in line with fundamental drivers (especially long term – corrections (profit taker investors) should cover short term blips/volatility). And temporary confidence/sentiment/perception loss/irrational, the government might want to consider intervening by balancing, keeping inflation lower than (USA currency would fall if inflation – prices were to rise), then the government’s strategy should be to ensure the GDP, overall/all country’s stock exchanges/market growth is higher than inflation. The idea of a decoupling (if a USA recession might cause a contagion) effect in simple terms is result of level of dependence on trade and investment (another reason saving Bear Stearns was important) between major trading countries…dependence of exports/imports where USA is a major importer of China’s products, but then there is the other side of the coin, whereby China is only vulnerable where China’s total GDP is not very large (not as many large importers of their goods to spread dependence on that are also not very dependent – decoupled from USA that rely on USA to export their own goods and services). The goal of the major economies of the world should be through global economic growth, perhaps the largest potential for growth for the economy is good ideas that create the most value by increasing efficiency/productivity of companies/employees…products/services that can create whole new markets (eg. the internet and the communications/entertainment market).

    Re: Sub Prime/Derivatives/Corporate Bonds

    I have several solutions that could probably if used together could solve this economic crisis.

    To the SEC and major Accounting Companies (also to create an impartial body of experts that can be a think tank) on how to regulate future bubbles and new financial instruments especially the highly leveraged with the tip off that are making huge returns on investments (ROI) suggesting and big risk downside if the stock market behaves in the extreme of the way the trader’s strategy was counting on…and continued the market continued to behave in that direction, and the trader tries to cover their losses by betting further that the market will bounce back… The Body said above will do an audit that will evaluate/estimate the size of not yet announced sub prime exposure of finance companies. Certifying size of total sub prime relative to increase in sales making the finance company that may be under valued because of lack of certainty. The idea is that those that get certified and turn out with less exposure will succeed most. Investors have peace of mind. The exposure could be ranked by risk (sub prime or derivative might) factors such as risk profile/credit worthiness of mortgagees eg. credit rating, net worth (overall debt to credit balance sheet - and the liquidity versus locked in) income earnings potential (possibly scrutinized by an impartial head hunter), co-signor(s) (credit worthiness), and collateral.

    Investors have the assurance that the finance companies mortgages of sub prime and/or exposure to bonds and/or exposure to very leveraged risky investments are audited, and there is very unlikely any more bad news from these 3 primary hindrance(s) to what should be a renaissance of world economic growth.

    Certification could further be used to value companies with good advantages, eg. leader in technology and low costs who’s stock price are undervalued but are strategically important (eg. Nortel…).

    To track rogue trader(s) you can start with the symptoms – the losses. Starting with the people in charge authorized to trade large amounts (who authorized a lower level trader, and/or let the trade(s) slip by without meticulous duty of care when dealing with large amounts of money). Back to the tracking of those responsible, submit all losses accrued (noting the larger ones because it is harder to get away with fraud if you have to do it many times versus a few large transactions). Furthermore each authorized personnel that are allowed to trade large trades are audited for frequent trades that over a time in the same direction can lead to large losses of large trades in what can be considered mistakes (in timing (GP)) in judgement (of never seen such hot demand for derivatives instruments and housing and risky sub prime investments both of which are leveraged eg. corporate bonds) driven by (initially) by greed and brokers feeling the need to compete (in sectors where the biggest money was being made) then by desperation buy even more to cover losses in the hopes that the new strategies that made them lots of money will recover.

    Bailing out of Bear Stearns because Bear Stearns placed too much investment proportion of funds on sectors that have not been dealt with/experienced with before is a good idea. Bear Stearns except for this recent mistake in investing in instruments whose implications they did not understand but saw their competitors making a lot of money on these types of financial instruments is an understandable mistake (as long as they don’t repeat the same mistake and what fool would in the same sector and the same risk factors – where there is less term investors’ (client’s) to invest in the financial instruments (the Structural Financing Dept.) demand out in the world (caused by fear and uncertainty that are the result recent spate of Major Banks Citigroup… sub prime writedowns, illiquidity) relative to oversupply because for Private Equity recipients of corporate bonds to finance their deals. However, since Bear Stearns and Citigroup have handled all other areas of financing (competently) for so long and are more than brand name but are a prestigious platform, and are head quartered in USA and have their large financings in USA, it is in the interest of USA to keep the afloat and as discussed below financial hubs are what leads to successful businesses, and jobs which increase better quality of life for the most people. Probably more importantly bailing out Bear Stearns is an indicator for potential investors that the government will fight to key financial institutions from failing and even prevent irrational panic domino effect. And to satisfy investors there is a floor and eventual long term chance to recoup. One other thing that could be done is create something like 3 strikes red flag a 150% (max) at a cap per year of 80% of fair appraisal of the value of the company rule, where companies are given 150% (max) at a cap per year of 80% chance of its appraised value (eg. discounted income stream and or imputed asset values) whereby the first time bail out is possibly 10% to 150% at a cap of 80% per year the balance can be used for bail out later years…and like automobile insurance policy the red flag (premium) is slowly cleared away as the company goes year after year without bail outs.

    Furthermore since certified companies (eg. finance companies that have proven little sub prime exposure), can stand on their own in the face of a uncertain market, and won’t fall to the domino effect, then the government only need focus on the uncertified companies for bailouts (with the red flag 10% to 150% at a cap of 80% per year, system in the paragraph directly above). And can even work with the certified companies to help with uncertified companies (when their sub prime exposure is made known).

    There are three main problems all caused by uncertainty...investors unsure about investing in USA bonds, housing, currency (probably because of the heavy debt the USA is carrying - since debt is often used as an indicator ability to pay back..., finance companies (which are the handle fuel - the reason I believe Bear Stearns bail out was a good idea because if go to any where in the world businesses/economies are driven by and even desired for most Finance Institutions with such a big name - put into perspective, Bear Stearns was an aberration caused by irrational fear)...if these sectors/industries fall, it may spread into the entire bourse and then other bourses worldwide. This spreading is believed to be caused by markets depending on each other for exports, especially USA of which manufacturing - China; Services - India and Bread Basket (bio crops) - Africa...needs USA market, although as their buying power to population grows (although this argument is controversial) apparently USA is less and less the buying engine to the world.

    Dealing with the Financial/Real Estate – Sub Prime/Corporate Bonds issued by over leveraged Private Equity firms Crisis: We create a separate auditing body with Finance Experts in particular field that are under crisis to deal unravel the workings of new important problems (eg. when the High Tech sector were in a bubble; if the real estate were in a bubble; derivatives; bonds for private equity investors; bonds for mortgages; rogue traders; loopholes in traders given too much authority to singly make risky decisions - especially if the trader is a star only in the recent past by making risky investments such as derivatives trading or betting on market timing which may presents the risk/return dilema, just because the trader is a star because he makes big money a few times, there is a large probability he can lose a lot on money too). The Auditors could come from SEC, companies accounting, our best University Business/Economic professors - to thoroughly audit and trace (of discrepancies especially) trades to cover wrong (market rise/fall) to try to earn lost money back. By offering the Financial Institutions CERTIFICATIONS that basically audit the amount and risky mortgages (eg. credit past history, net worth, incomes expectations, co-signor, collateral and debt/equity leverage) of sub prime mortgage exposure as soon as possible, we are able to ell which Financial Institutions are healthy and which (might need further right downs in the future and therefore potential candidates for bail out). More importantly investors are able to tell which finance companies are safe – therefore taking away the uncertainty of future sub prime write downs which leads to the UNCERTAINITY (of future) of the ensuing spill over effect of lack of USA (Buying) market and cooling off Stock Markets worldwide.

    Re: Response

    Traders that are not authorized or traders that are authorized - the amount risk they take caused by period of high risk taking investments, (highly leveraged) and bubble (don't know when to stop) while being driven to continue to increase performance by taking on high risk investments that made money for a while in the recent past. Perpetuate the same strategy...Because of recent past decrease in market leaves the financiers overexposed to committed high performing sectors (eg. Sub Prime; Bonds) where in the past the financiers were highly rewarded leading to over relying on high returns (leading to over leaning on) the belief in these bubble (booming sectors (sub prime, bonds...) heavily weighted exposure for expected high returns.

    Selective bail outs could be done for companies (finance companies) down stream to the mortagagees, though I personally believe that finance companies that should be healthy such as Bear Stearns should be bailed out as all companies /economies in the world depend on financing. The companies that receive this financing turn their budget into profits (added value) which as well as flowing into job creation, also grow the world economy (import/exports). I suppose to be fair, bail outs could be first come first serve.

    Central Business Distract Land and high density as well as Urban Sprawl for commuters are non-renewable, you can’t produce more land near the CBD, therefore land prices should rise again, the question is 1.) when will it rise above the prices paid for by buyers pre-sub prime crisis 2.) how long will it take for investors to get over their fear of being burnt given this sub prime crisis 3.) the growth of other sectors of the economy (of which finance companies can participate via investment) that cause incomes to rise, driving up cost of housing in desirable locations – noting that market prices are a product of competing buyers versus sellers and who are more motivated.

    Re: Long Term Investment steady growth, versus being a big loser/winner…

    Why Long Term Investing is a safer route. Supposing (hypothetically speaking) at the end of the year gains nearly equal losses (the probability are 50/50 + fundamental growth of making an amount of money or of losing an amount of money). Over the long term GDP growth companies not caused cannibalized in market share of new company in the same economy and/or where one company win over market share of buyers because it has clear dominance in the market competitive advantage which can come form any area of the organization (eg. research and development, quantity/volume, quality, operations efficiency, and/or management strategy.

    Given the above assumption where over the long term the final market price is higher. But trading stocks in the interim the stock’s market price can be volatile. If this is the case one investors loss is another’s gain…it is an exchange between investors, with a probability near 50/50 to make and amount of money or to lose an amount of money – the amount depends on the size (eg. height – sudden rise or fall). By timing the spikes the investor can gain a lot of money and lose a lot of money (the psychology is – greed is when investors buy into the market or sell as late as possible to (maximize) time the spike rise; fear is when the sell out of panic or sell too early). Amount invested is also another risk factor. Where timing spikes can gain a lot (over many spikes) or another can lose a lot – losing being a down side that if fully invested may not be recoverable and thus I prefer long term investing. Long term investment ensures companies have a stable access to funds to operate, but more importantly can create the budget strategy to finance their venture to success, since my personal experience in the industry is that there are very many good companies with good ideas that only need financing to make good profits. Good companies I define as ones with sustainable competitive advantages (eg. patents…) two of the dangers for any/all companies is when a new technology or business model (eg. convenience), fashionable trends outdate the companies’ products.

    Re: Government Action

    The government could create new financial instruments where foreign investors can invest in undervalued real estate (without Americans feeling threatened). The government would insure/guarantee the investments fund 10 to 70%, to offer to long term home owners that qualify for the program and stay afloat and not lose their home, and even defer interest whereby when the real estate prices rise past the price the investments fund paid the owner can sell the home and pay back the interest deferred. The investments fund can also garnish wages including a proportion of welfare (rental), all above other income above, paid out to/payoff the deferred interest.

    It is up to the government and the involved institutions to prove honestly and transparently, beyond all doubt for all investors and constantly drive the point home that the certified companies are as safe as it gets. The government could even guarantee/insure (perhaps 30% equity of the company allaying the financial institution’s creditors (eg. bond holders), whereby if there is a run the payout is first come first serve, and once the government runs out of committed funds, they can freeze payouts offer to defer the debtors (eg. mortgagees) interest payments until a minimum price has been reached (via natural supply and demand). The government should use advertising on electronic trading web site…and possibly to any people with a net worth of 5 million or more. Explain clearly why investors have nothing to fear on Certified companies. The government communication (with official website) that shows how risk is almost totally eliminated and to get the point across that investors can’t lose money in this investment clearly and absolutely, strong point, beyond all doubt, no other instruments or place to put your money compares in terms of safety. Keep reinforcing every single day; it could be safer than gold (down side is limited, but can enjoy large upside). The profit motif/win win to all parties.

    Re: This Certification Program (continued) can be used for any and all bubbles…

    The USA’s Debt: There are 3 ways (one at a time of in combination) for the USA to payoff its debt.

    1. Increase exports which creates real values versus retail where companies are just recycling money, the point is that companies are making profits of the same GDP nation’s economy versus selling to make profits from outside the GDP nation’s economy.
    2. The best way to jump start an economy is to bring in investors (eg. Singapore, Dubai, Hong Kong), a financial hub so-to-speak, investing in a domino/cascading momentum of the engines that drive economies, the financial institutions, and the cascading down stream of job creation (wealth building as a whole), bailing out Bear Stearns was like a floor whereby investors can lay their worry to rest – while the SEC and Finance Companies look for ways to make sure such crisis/fiascos don’t happen again.
    3. To payoff the debt the government can raise taxes; the question who to tax and how much…corporations, individuals, rich, poor, occupations…
    4. The fourth is if the government cuts spending (except in the economy) and creates a surplus which can be used to pay off debt.

    Re: What to do if a Currency Crisis

    To deal with the USA currency weakness we could form a currency of the Americas. It would be synergistic (and not under the major competitive of Euro). USA has the premium brand name that until recently was the stablest currency for half a century (the DOW/NYSE has the stablest bricks and mortar brand name and NASDAQ has the the ability to finance the latest advances in the sciences bio/life sciences, engineering, new technologies…Canada is a balance against USA, Canada has some high tech, but the majority of Canada’s TSX is in commodities, which is a home run for growing/developing world; Canada also has much unused land…Mexico has the nicest beaches for tourism/food and beverage, and many desperate workers who are willing to do jobs nobody else wants to do…Chile has much pristine land/clean water (eco-tourism) reverse cycle vegetable/fruits produce to North America…Brazil is the hottest of the economies in the Americas which should perk up the United American Currency… Argentina can combine their livestock farming to become the bread basket and bio crops of the Americas…

    Stock Market prices are determined by demand between buyer and seller (what and how much they are motivated), perception of fundamentals and strategy… Supply can be defined as the ingredients (inputs) – back end of value added components (parts) factory (down supply chain) and factors (down the value added company chain) that influence they upstream costs; demand is need for final goods/end products (output); and the factors that influence – costs to research and development, operations, marketing and also the growth chain – incubation, mass production, market ready, head to head competition…Factors that influence supply and demand should be rationally based (specifically fundamentals), but too many investors lose a grip (whether fear or confusion over uncertainty, or betting – for the big returns based on really impossible to predict exactly over large number of rounds) and end up making investment decisions based on sentiment, rating quality…

    Re: Capitalism and how it Functions:

    Some of the key differences (traditionally) between Communism and Capitalism are that Capitalism is not only sustainable, but naturally (invisible hand) allocate (investors flexibly, and quickly switches where mistakes becomes apparent (made by investee companies), and balances between sunk (locked in) to variable investments and their different profit margins to ensure the investment is/are worthwhile. Naturally allocating to the highest yielding (investments) use of funds (short term) goal is to get the most gain in the shortest time (which is often the riskiest) most volatile versus long term for the allocation of capital depends on stages of company (eg. mutual fund that only goes after value (currently out of favour stocks), or switch from basket of growth to venture capital, starts with (incubate, nurture) early stage company with a good idea and then exit at IPO or after market. These are the basics in which a company has can be said to have good fundamentals given sustainable competitive advantage when endowed with good product ideas that are patented and not easily outdated, and then every company needs the financing to buy-in expert management (the more tricky the different management have different management style (eg. low cost – affordable, high volume – many contracts in the developing world) of Nortel vs. (eg. Upper end equipment for the Techie companies of the First World Nations that want the latest and the best performing technologies) of CISCO…

    In communism (which is probably why communism is so vulnerable to; falls prey to totalitarian/dictatorship) is a top decision making process where the top or near top leaders decide what is best for the people, while democracy when inspired can vote for the candidate and party they expect will grant them (at least their most pressing concerns) of the policies they want. It boils down to what people want…eg. many developing countries need safe fresh water – clean up from pollution to produce clean and non-toxic/no heavy metals food from farms (eg. irrigation…), education for social mobility, which gives higher quality of life so to dream of better life (expecting better than parents), increased buying-power (with an eye for certain types of products) from the first world, electronic (toys) and luxuries (name brand fashions) and well as real increase in quality of life by ability to stay in touch with large friendship network any where in the world and at any time (constantly and discretely). As well as dream based on religious beliefs desires/pursuit motivations that are socially acceptable.

    Communism traditionally can win (via rallies) of the hearts and minds of people towards loftier goals (also using propaganda…) but does not allow dissent against party. Capitalism drives individual needs, profit margin (ultimately quality of life, from democracy of exercising right to participate in representative government via electing a government that will – kind of like a proxy Board of Directors vote(s) whereby the government once in power will legislate in the interests of the voters that put them there…concerns such as human rights, freedom of speech…economy.

    Re: Additionally

    Additionally finance companies that are bailed out (eg. red flag – 10% to 150% cap at 80% per year of appraisal value) should be required to have their financial statements reviewed (perhaps bi-annually) to ensure that they are not taking on heavily weighted towards new unknown instruments, and high leverage investments (which can be tempting) to payoff debt, but rather maintaining in lower risk/conservative investments that will allow them to slowly payoff debt without going under and via perception (eg. the adage where there is one cockroach there are more cockroaches) of how many mines in the same sector or geo are waiting to be reported and even business analyst (the fear mongers) lead investors to sentiment/perception, of uncertainty (and as bubble sector/geography falls in prices investors begin spreading their fears to other exchange/stock market bourses the contagion effect)…The point is to avoid encouraging bailed companies from relying on the government company from saving them every time their highly risky behaviour causes them insolvency to the detriment of threatening the entire world economy.

    Is there that much money in circulation…if all the world were invested to the hilt, then the problem is that investments that switch back and forth between sectors and stock exchange and geo (developed/developing) markets are largely paper shuffling, and money being made by one entity is lost by another entity so there is no real value being made for the investment community as a whole.

    Which brings us to two conclusions, 1.) most profitable value added ideas, where the ideas are good, demand will allow the company to charge more and make more money, while the buyers get more consumption value, and supply costs are cheap (such as automation/robots; and/or cheap labour of whom have come from even worse occupations (even lower income of lower safety – both of which are bad for developed world workers – competing), but safe. 2.) increase in GDP by growing exports as other nations get richer they can afford (although proportions of imports may remain the same overall increase means a bigger pie) more imports from their trading partners exports.

    A bubble can possibly be recognized and its risk (uncertainty) eased – sensitivity of investors, by noting/tracing which new instruments/sectors – direct or supply up stream or down stream are giving huge returns for each dollar invested and are over valued in relative of its own fundamentals benchmarked against the fundamentals of other instruments (of similar expiry…sectors/companies. Fundamentals are sustainable competitive advantages (which investors should be prepared to act on as soon even on rumours that signs suggest the sustainable advantage is losing (analogue erosion), versus suddenly lost (digital, announcement of competitor with a better product), the strengths/weaknesses of the economy/stock (sector/industry) that comprise the economy, imputing critical broad economic health issues such as national debt to exports (GDP) real growth in the economy (GP 1.5%), including government spending and taxes.

    Monetary Representations:

    Appraisals: measuring strengths, weaknesses; positioned to best make the most of an opportunity, vulnerability to certain weaknesses – ability/capability to to mitigate or worse case scenario/exit strategy.

    Feasibility is the totality (while high lighting major drivers - categories and value to whom) cost to benefits to/from company/society…

    Multi criteria only the most influential large impacting (most valuable impacts) most effective, most (perceived) versus within category general benchmarked estimated monetary value for that factor/criteria.

  • Comment number 87.

    sellers may capitulate , buyers may capitulate.
    With interest rates at such low historical levels, and with fixed deposit rates being offered by institutions who we dont know will survive for long, i know where i would be prepared to put spare cash.... and there are alot of people out there just sitting and hoping that this will happen..... just like 2001 when all the clever people were selling up and renting waiting for the big drop.

    what happened??? within 2 years they were helping chase the market up.

    Grow up Peston and stop trying to make a name for yourself!!

  • Comment number 88.

    The Finnish banks applied the practice at the end of the 1980's that the borrowers had to finance 20% of the purchase value of the house or flat.
    But, during the banking crisis in 1991-1993 the housing price declined by 40 per cent, on average.
    So, it is not the margin the borrower must finance which causes the general decline of house prices!
    The true cause is the madness of the central bankers who do not understand monetary management (Finland) or who all (the ECB, the BoE in this decade) feel obliged to shadow the Fed's bubble policy!

  • Comment number 89.

    Banks don't usually withdraw a financial product unless they believe either it is unprofitable to them to offer that product or if they will make heavy losses in the future because they are already seeing losses from current customers with those financial products.
    The credit crunch has forced up borrowing rates for banks which has forced up the rates they charge mortgage holders. This has hit affordability for borrowers and market indicators show some borrowers are struggling with mortgage repayments.
    If banks did not withdraw 100% mortgages now they would be accused of selling financial products to mortgage borrowers that they could not afford to pay off in the future, as well as damaging the banks finances hurting shareholders.

  • Comment number 90.

    Why are so many people getting worked up about the present credit crunch and the likely downward effect it will have on house prices.

    If we take builders and the big property speculators out of the equation there are two basic reasons why ordinary working people should want to buy property instead of renting. Firstly, for the vast majority of people buying a house is a better long term option than renting and this is especially true in retirement after the property has been paid for. The other reason is that some people believed (up until nowthat is) that owning additional property would show a better return than other forms of saving or buying shares.

    In the case of the majority of people who decided it is better to buy than rent, they should not become too dispondent if house prices do drop by as much as 20% and if the effects of the credit crunch lasts for another 5 years. If they sit tight house prices will normalise and by then they will be wondering why the banks reacted as they did. They might not end up as rich as they were hoping to be but owning your own home should not be about getting money for nothing.

    The same thing applies to those people who bought at the top of the market and are now struggling to repay the higher charges being demanded by the banks. Providing they remain in employment these people should be able to come to some arrangement with their mortgage providers to continue making the same regular monthly repayments albeit over a longer period. That might be upsetting to them now but in a few years time their situation might allow them to increase their repayments.

    That unfortunately leaves the proportionally small but none the less sizeable numbers of people who, for all sorts of reasons, borrowed more than they could reasonably afford in the expectation that house prices would carry on appreciating in value and they could remain jump ahead of becoming insolvent or bankrupt. Sadly those people will now find their gamble has failed because the banks will no longer condone that behaviour. Over the coming months the true numbers of people in this catagory will be revealed and only then will the full extent of the banks problems become evident. Some of the more delinquent builders and property speculators will also come into this catagory and it will be interesting to learn which of these two groups (home owners-v-property speculators) will be giving the banks the biggest headache.

    My best guess is will take a further twelve months before we know for sure. So just hang on in there.

  • Comment number 91.

    Let the market find its own level. If they need to fall they will fall.
    In fact, if anyone is GENUINELY concerned about first time buyers the fall they must.
    Just because people FEEL poorer then not to put to fine a pont- that's tough luck.
    What they REALLY mean is that there piggy bank is in danger of drying up. Well again - tough luck and learn to live within your means or sell the house if you can't afford it.

    These type of people of the very ones who have created this mess. Prices are set to plummet - get used to the idea!

  • Comment number 92.

    Having listened to Robert Peston on the radio I'm amazed he can be so patronising on the web.

    Stating the obvious = yes
    Bizarre stress on unusual syllables = sadly missing
    Ignoring the impact of all those people who can buy a house at a reasonable price and use disposable income to fund the economy = yes
    Bizarre extrapolation of vaguely linked items = yes

    3 out of 4, 75%, or as Robert would say (and then ask to be paid for) some THINGS are right, SOME things are wrong, no-one CAN say for certain

  • Comment number 93.

    Another downbeat, one sided, biased report from Robert Peston. Just hope if House Prices do crash and unemployment does go up those in the media who have helped precipitate the crises and fed off the sensationalist headlines like Peston are the first to suffer!

  • Comment number 94.

    Monsieur Spencer, chill, crack another bottle of vino, it's going to be alright - consumer debt is £200bn, not £1 trillion. And the nation's net worth is £7 trillion, or over 8x disposable income. Your old friends in blighty will be alright even if there is a major correction.

    Worse than the early nineties? 3m+ unemployed (cooked), interest rates doubling, UK manufacturing dismantled (it had to happen). I don't think so. But I could be wrong.

    Re. the housing ladder - there were enough people jumping on to get prices where they are now (admittedly aided and abetted by our stupid banks), and that's without double MIRAS relief - a true bubble. Quite a few will fall off again, granted, but I honestly don't think it will take that much of a fall for many to jump on again, along with those pesky BTL boys who can always get another job if their margins are squeezed and would be mad to sell into a falling market. (Most will not have to - look at the CML stats, or the Paragon stats; a good proxy at c. 10% of the market). Could be wrong. In any event they are likely to prove more robust than the first-time buyers of the late eighties. (Interest rates, blah).


    I agree, and enjoy the debate. What can be irksome, however, is opinions presented as fact and based on nothing but the ramblings of chippy journalists or economists trying to make names for themselves. Oh, and also the slightly distasteful crowing of those who have been calling the top for so long and are now "right". Anway, they made a pig's ear of calling the top, let's see how good they are at calling the bottom. That's much more difficult. (And I wouldn't rely on the HPER graph alone either).

    I certainly do hope there will be a "significant" fall, but I hope it can be contained without resorting to the slashing of interest rates. That would exacerbate the problem.

    I don't, based on my analysis (which I wish I had in 1988!), believe it will be as much as 30%, but there are variables that are difficult to call right now.

    Geoff, your absolutely right. We all need to chill. Que sera sera. I'll crack a bottle of vino with Mr. Spencer.


  • Comment number 95.

    I think tonySpencer (72/73) made some really good points and I've really enjoyed reading the posts tonight.

    I bought a 1 bedroom flat in 1988 and sold it in 1999 for 70% of the price I paid for it. The problem was that after the general price fall all the first time buyers could afford to leapfrog the 1 bedroom flat and it took a long time for these prices to recover. Anyone in the same position today could be in for a long wait to get their money back

    It seems to me that there are a million statistics and facts that people can quote to support any kind of argument. The problem is that the situation is so complex.

    For myself I think we are in for a rough ride, there seem to be many crises coming to a head at the same time and we have a government who seem totally incapable of thinking through any problem (many commentators were predicting that the rush to biofuels would put up food prices but we did it anyway).

    I don't think that the draconian measures against the banks which some people have been advocating would do any good, even if the government were allowed to introduce such measures by thier owners. The banks (and other large corporations) have got us by the short and curlies and the government have no option than to react as they are doing, letting banks fail is not an option they would just pull the plug on us.

  • Comment number 96.

    People need to realise that the massive asset inflation we have experienced recently underpins Government policy - it is central to the monetary policy control operated by the Bank of England. Just read the BoE website under "How Moneary Policy Works". Quote:"Higher house prices enable existing home owners to extend their mortgages in order to finance higher consumption."

    Personally I think this stinks. The Govt is using asset inflation to generate wealth at the expense of private debt as it is all we really have left; no manufacturing base etc. It is the only attractive option to outside investors, generates huge revenues for financial services. They can't let it fail... Problem is it is not sustainable, as they are finding out to all our cost.

    Also of interest on the same website are historical interest rates

    We've had cheap money for too long; unfortunately it is a key factor in asset inflation. I do wonder though with the huge cost of living increases (despite official published low levels of inflation) whether such low rates are sustainable. Clearly there are inflationary, exchange rate and credit risk pressures which would suggest otherwise...

  • Comment number 97.

    Come on Preston, Prophylactic?, a vaccine to prevent against a disease, or a contraceptive device? Is your own house your major asset, don't talk it down.

  • Comment number 98.

    What tosh!

    If buyers are knocking 10% off, then a sensible seller will be over pricing what they are willing to accept to compensate for the knock down - sellers and buyers are equally (ir)rational in their perceptions of the market. Going back to a 10% deposit is a return to the lending principals that were in place previously. I dont think house prices have tended towards 0 over the last 100 years!

  • Comment number 99.

    Where the banks failed on 100% mortgages was in the common sense criteria department.

    It stands to reason that offering 5.5 times income on an ineterest only basis to 100% and sometimes beyond is a recipe for disaster, especially if you are offering interest rates that are not too dissimilar to standard market rates.

    I favour the staggered system where the more you can deposit the better your rate will be. 100% should be the maximum lent and at a maximum of perhaps 3.75 times joint income (reflective of rates that remain relatively low even now). this would allow struggling First Time Buyers to get onto a market which always tends to increase in the long term.

    The only word of caution I would have is that a home should never be treated as an investment. But, rather, a place to live, from which you can climb the ladder.

    Incidentally, it appears to have gone unannounced that one lender has gone back into the First Time Buyer 100% arena since Monday with a 4 times salary, £350,000 ceiling. Not sure I should give the name out (product placement possibly?), so let the BBC do their digging.

  • Comment number 100.

    The banks did not necessarily think that house prices would go on up for ever. Any branch manager in a bank building society or other loan institution who did not lend enough money would have been sacked or not received bonus. It was not possible to have independent thought and do the job. Only politicians can regulate monopoly behaviour, and they must be responsible for the me


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