Even a stopped clock gives the right time twice a day.
That immortal line, uttered in the film Withnail I, just
about sums up the media and its obsession with the ebb and
flow of house prices. We have been predicting the end of
the housing boom for so long that, sooner or later, one
of us must get it right.
That a slowdown is at last happening seems in little doubt
in the wake of the longest period of house-price growth
since the second world war. But it is not before time for
veteran doom-mongers, for no sooner was Britain out of the
infamous Thatcher recession of the early 1990s than the
bears started to come out of their caves.
Take Hamish McRae in The Independent, just after Labour
came to power in 1997. McRae was talking about the broader
economy, but his piece on October 1, headlined “The
boom will go bust - here’s how to brace yourself”,
was a masterpiece in false prophesy. Unemployment would
rise within a few years, he confidently predicted. And there
was “reasonable certainty” that a “sharp
slowdown in the world economy” would start within the
next couple of years. Instead, economic growth in the developed
world has been just fine, more or less, for the past eight
years.
McRae predicted that, “amid the triumphalism of Brighton,
remember that this will be the government that is in power
during the next recession.” This may one day be proved
true - in Labour’s third, or even fourth term perhaps.
While all economic forecasting is hazardous, house prices
have been especially so. The Daily Mail, the mid-brow tabloid,
is usually thought to have cornered the market in property
scare stories, which Private Eye satirises with such send-up
headlines as “Influx of asylum seekers causes house
values to plummet” or “Property prices fall as
asteroid prepares to wipe out life on Earth”. All newspapers
have chipped in over the years. In September 1997, The Sunday
Times ran the following article: “House prices keep
soaring, but only in sought-after areas. Nick Gardner asks
if the property boom can last.” Despite what the economists
were saying about slowing prices, he wrote, “it seems
that nobody is listening... “
That was nothing compared with the dire vision conjured
up by the Financial Times. “Is another property crash
imminent?” asked Anne Spackman, then property editor,
on September 13 1997. “Overheating” in London’s
property market was reminiscent of the late 1980s. Spackman
- now managing editor of The Times - quoted an anonymous
housebuilder saying that people had been paying crazy prices
and “the next year is going to sort the men from the
boys.”
Yet in 1998, prices rose 6 per cent. This was followed
by 15 per cent, 10 per cent, 8.5 per cent, 22 per cent,
12.6 per cent and - during last year - 12 per cent. But
the predictions have not been limited to the British media.
In 1998, Business Finance magazine predicted a crash in
Ireland’s housing boom. The Christchurch Press reported
that year that house prices in New Zealand were about to
fall by 40 per cent, according to Charles Drace, the author
of How to Survive the New Zealand Residential Property Crash.
Yet six years later - in the summer of 2004 - property prices
were still rising there, at an annual rate of 22 per cent.
The Economist, in its latest quarterly update on world
house prices, in June, warned that we were in the “biggest
bubble in global history”. Housing markets around the
world had looked “alarmingly frothy” for some
time, the magazine said. The way in which the boom would
end could decide the fate of the whole world economy in
the next few years.
For most commentators, particularly in the UK, it was clear
the boom would run out of steam. In November 2002, Steven
Bell, global chief economist at Deutsche Asset Management,
was quoted in the Daily Express in explicit terms: “House
prices, particularly in London, are set to fall by 10 per
cent over the next year and could drop by 20 per cent.”
One month previously, in an article entitled “The
housing boom in London is over. Ed Crooks considers how
far and how fast prices might fall”, the FT economics
editor of the time said that it would be rash to assume
the property market had no surprises left.
He quoted David Miles, the highly regarded professor of
finance at Imperial College London, who warned that a benign
end to the boom was unlikely. “In the past, when there
are examples of things moving out of line, they have tended
not to move gradually back; they have tended to move with
a bang,” the professor said.
Journalists found plenty of other distinguished academics
to back them up. These included cerebral academics such
as Andrew Oswald, a professor of economics at Warwick University.
In November 2002, he wrote: “I think we are about to
go through the great housing crash of 2003 to 2005.”
He had been right about the end of the 1980s boom, he pointed
out. The coming crash would be even more hellish.
“I advise you to sell your house, and move into rented
accommodation,” he wrote, before ending on the dramatic
note: “Panic will then set in.”
Andrew Farlow, an economics tutor at Oxford University,
struck a similar note in a research paper published in the
same month. “Today is probably the riskiest time in
a generation to get on the housing ladder,” he advised.
In July 2003, just before the market hit another bull run,
the Daily Mail wrote: “Britain is heading for a housing
market slump amid evidence that the gap between property
prices and pay is at a record high.” The article, by
Sean Poulter, was backed up by impressive statistics. For
instance, the house price to earnings ratio had reached
5.2, compared with a long-term average of 3.6. The figure
has since crept up to 5.7. The article - like countless
others - leant heavily on research by Capital Economics,
by now the best-known of the bears, which has predicted
price falls of up to 20 per cent.
Capital is run by Roger Bootle, a former chief economist
at HSBC and one of the Bank of England’s committee
of “wise men” under the last Conservative government.
The company has put its reputation on the line more than
anyone else. Invesco Perpetual, ABN Amro, Durlacher, American
Express, Goldman Sachs and various other banks have predicted
double-digit falls in house prices. Yet most have confined
their thoughts largely to written reports - whereas Capital’s
favoured status among the media has made it the public face
of pessimism. “There was definitely a period during
2004 when every time the media wanted to paint a contrarian
view we were wheeled out for a quote,” says Ed Stansfield,
the group’s property economist.
Capital first came out at the end of 2002 with a prediction
that strong growth would go into reverse by the end of 2003.
As it happened, the continued strength of the property market
in early 2004 was a source of frustration, admits Stansfield.
“It is obviously very poor for us to be seen as banging
the drum in an environment where everything is quite clearly
moving against us.” But he argues that the company
turned out to be only six months out in its forecast - given
that the current slowdown began in the summer of 2004.
”Not terribly successfully, we have always tried to
distance ourselves from the words ‘housing’ and
‘crash’ and prefer to talk about a correction,”
says Stansfield. A nominal fall of 20 per cent is realistic
because it would still leave the ratio between prices and
earnings above the long-term trend, he argues.
Throughout all this, the Bank of England has trodden the
most delicate of balancing acts; by trying to take some
heat out of the market while dousing fears that it would
all end in tears. Comments by Mervyn King, the Bank’s
governor, included this sphinx-like observation: “The
best way to destroy the credibility of the monetary policy
committee is to lecture people about house prices.”
Yet by November 2002, even he was admitting that there was
a “growing risk of a sharp correction”. In the
same month, Martin Wolf, the FT’s esteemed economics
commentator, agreed the end was nigh, although - perhaps
wisely - he did not put a date on this. “Do not believe
these rationalisations for bubbles. Be afraid, instead.
This is not an economy chugging smoothly ahead,” wrote
Wolf. “It is an unstable economy, divided in two. Smooth
adjustment is imaginable. With house prices on the rampage,
it looks less likely by the month.”
And yet house prices continued to defy the reasoning of
such commentators. Unlike many other assets, such as gilts
or equities - which usually are influenced mainly by professional
decisions - housing is an incredibly democratic market.
The average price of a home is entirely a function of decisions,
sensible or otherwise, by millions of ordinary people buying
or selling homes. Should they decide that it is rational
to borrow six times their salaries, when renting might be
much cheaper, there is little the intelligentsia can do
about it.
As the boom appeared to enter its last lap, the British
public was warned by no less a figure than Lord Lawson of
Blaby - Nigel Lawson, the chancellor from 1983 to 1989.
Speaking to the Council of Mortgage Lenders in April 2003,
the man who presided over the previous housing bubble gave
his warning that a soft landing was “unlikely”.
“I suspect that [Gordon Brown] is concerned that his
implausible economic forecasts will be undermined by the
bursting of the housing market,” he said.
Such views were not confined to the former party of government.
Vincent Cable, now the Liberal Democrats’ treasury
spokesman, wrote an article in the FT in January 2003 -
two and a half years ago - saying that it was “implausible”
that prices would gently stabilise over many years until
earnings caught up with prices. Instead, Cable said, there
was a greater danger they would crash, as in 1973 and 1989.
In April 2004, another hand-wringing prediction came from
the most authoritative of sources: the International Monetary
Fund, whose World Economic Outlook report said there was
a “likelihood of a sharp price correction”. And
in the same month came a call from Tony Dye, head of Dye
Asset Management, that prices were ready to topple. (Dye
had already earned himself a reputation as “Dr Doom”
by accurately forecasting the collapse of the dotcom pyramid.
Unfortunately, he had been premature in his timing - and
left his previous job at Phillips Drew after missing out
on potential gains during that boom.) Dye’s comments
in an article in the FT, “Everyone is hoping for a
soft landing but, no, we don’t have soft landings in
things like this, ever”, were carried the next day
by most of the national press and several television programmes,
and picked over at length.
The obsession could perhaps best be encapsulated by housepricecrash.co.uk,
a website devoted entirely to the question of when and how
the bubble would burst. This website has a host of graphs,
articles and links on the subject of house prices and has
15 million hits every month - or 8,500 unique users a day.
It is run by half a dozen people, all of whom have day jobs,
as a non-profit enterprise. Its founder, a fund manager
called Greg Sutton, is 30 but looks older.
Over a pint of lager at a faux-Irish pub in the City of
London, Sutton freely admits why he set up the website more
than three years ago: because he cannot get on the housing
ladder. He and his wife, who live in Ealing, have been waiting
in vain for years for prices to fall so that they can buy
their own house in the west London suburb.
”I set it up because I am a frustrated first-time
buyer, I have a job earning a reasonable amount of money
and can’t buy a house at these prices,” he says.
With him is a lawyer, Reinhard Schu, 37, who acts as the
website’s spokesman. Schu’s conviction is also
partly driven by personal reasons, although they are the
converse of Sutton’s. He sold his home two years ago
because he was certain that there would be a property crash.
Now he would like to be proved right.
It is clear that they are both convinced that strong economic
arguments underpin an impending crash. “In our opinion
house prices have gone to a truly unsustainable level. They
are truly overvalued. There is a very strong group of vested
interests, such as estate agents and mortgage companies,
and people who make DIY programmes,” says Schu. “We
were facing a recession in 2001, but the government lowered
interest rates, so the Brits spent their way out of the
recession. It was in their [Labour’s] interests to
create a bubble.”
Yet the bursting of that bubble has already started, argues
Sutton. House prices are already falling in parts of the
country - according to some surveys - and everywhere there
are standoffs between buyers who will not offer the asking
price and sellers who will not drop it. “If you look
at the coverage of the 1980s crash, in 1989 or 1990, when
prices were falling, the headlines were always about how
the recovery was around the corner, how prices would pick
up, but they never did,” he points out.
The house price crash website often throws ad hoc meetings
in the pub for users of its chat forum, sometimes attracting
up to 20 people. “We talk about everything - we are
not that sad - but on the forum we only talk about house
prices,” says Sutton.
Being wrong on the timing of the crash has not dimmed the
pair’s conviction that they will be proved right in
the long run. “It is going to be nasty,” says
Sutton, as he drains his pint. “It could be worse than
the last recession. It could even be a global depression
given how many housing booms are in sync - Australia, New
Zealand, Spain and the US.”
This is an opinion that holds currency with some highly
regarded commentators around the world. Robert Shiller,
the author of Irrational Exuberance, a perfectly timed exposition
on the reasons for the dotcom crash, has returned with an
updated edition that now encompasses real estate as well.
Shiller, a Yale professor of economics, argues in the book
that the world is in the grip of a new bubble which is larger
than its recent stock market equivalent and just as likely
to end. His fascinating view is that the greed of the stock
market speculators did not subside five years ago, but merely
spilled over into property. In other words, the widespread
belief of investors that they could make spectacular returns
without risk has survived - but within a different asset
class.
Shiller says that the growth of an economic bubble is driven
by a “feedback” mechanism, whereby the more an
asset rises in value, the more people want to join in the
fun, which makes the asset rise further in value, and so
on. As a result, prices are always likely to overshoot sensible
values, just as they may well undershoot them when the bubble
bursts.
Yet Shiller is careful not to put a timing on the end of
the boom - perhaps wisely, given the fate of others. In
addition, the US real estate boom may have longer to run
than elsewhere, having only just hit its most explosive
period.
For some critics, the doom-monger phenomenon calls to mind
the crazy men with placards who like to forecast the end
of the world. One day, one of them will be proven right
and the rest of us will be the mad ones. Sadly for the crazies,
however, this may not be imminent.
This view is summed up by John Wriglesworth, economist
at the property and research database company Hometrack.
He once said that the idea of house prices falling by 45
per cent was akin to the chance of finding Elvis on the
moon. Many “experts” - albeit mostly with vested
interests - still sound convinced that there will be a soft
landing.
This view still has some willing sympathisers. Catherine
Riley, property editor of The Times, wrote in January that
the doomsayers were like the farmyard inhabitants in Chicken
Little - a cautionary fable of chain-reaction panic designed
to teach children courage - who believed that the sky was
falling down because an acorn had landed on Chicken Little’s
head. “And is the sky falling because prices have dipped
in the past six months? Of course it isn’t,” she
wrote. “Don’t listen to Chicken Little. The sky
is not falling.”
And yet the pessimists’ time seems to have arrived
at last. Just because they got it wrong before there is
no reason to believe they are more likely to be wrong now,
as some would have you think. In fact, the reverse is surely
true. In a few years’ time, it may be the mortgage
companies and housebuilders, which have long lived on a
diet of unbridled optimism, which look foolish in retrospect
- whether house prices fall in nominal terms or only in
real terms.
But ironically, many commentators have become so weary
of being caught out yet again that they have fallen silent
on the subject. Andrew Oswald, the Warwick University professor,
for example, now refuses to talk publicly about house prices.
There is a widely used expression in stockmarkets that
the right time to buy shares is when the last seller has
sold. Perhaps the right time to sell residential property
is when the pessimists have given up and the last buyer
has bought. At least, I would hope so. Last summer, the
FT’s new property correspondent wrote: “My guess
is that in two years’ time they [prices] will be lower
in real terms as once the momentum has drained away from
the market, the balance of supply and demand will shift.”
The writer went on to say that some readers might think
this unmitigated nonsense. “In which case, cut out
this article and in a few years’ time, should I be
proved wrong, feel free to visit the FT’s riverside
offices where I will masticate my own words.”
Source
- FT
