How low will house prices go in 2009

Recovery in house prices in the UK will be a long way off.
This past year will go down in the UK as the one in which the housing market raced from boom to bust.
In the autumn of 2007 prices began to fall each month as the international banking crisis took hold.
With the mortgage supply drying up, house sales have now slumped by more than half, first-time buyers have increasingly been driven from the market and the construction industry has plunged head-long into recession.
Building sites have been mothballed, thousands of workers laid off, and millions of unsold bricks are now being stockpiled around the country. And if the surveys by the Halifax and the Nationwide are anything to go by, house prices will end this year between 15% and 20% lower than they started - easily the biggest annual slump on record. About £30,000 has already been knocked off the selling price of the average house in the past year, and people have stopped borrowing extra cash against the now deflating value of their homes. So what will 2009 bring? More of the same or the beginning of an upturn?
More falls to come A year ago many experts were predicting that prices would be flat this year or might even rise a bit. Those views were rapidly outstripped by events. Now most commentators believe that prices will continue falling well into 2009, indeed maybe for the whole of the year. "We will expect prices to continue to fall because of the economic conditions; you wouldn't expect the market to turnaround in those conditions", says the Nationwide's chief economist
Fionnuala Earley, referring to the growing recession. Her counterpart at the Halifax, Martin Ellis, echoes that view. "We are comfortable with the view that there will be a 20% fall over 2008 and 2009". So if prices fall 15% this year, will they drop by just 5% next year? "We don't want to be too specific about next year," he replies.
Both lenders in fact will publish their formal house price predictions, with more specific figures, in the next few weeks and so will the lenders' trade body the Council of Mortgage Lenders. It recently described making short term house price predictions in the current market as "futile". But CML spokesman Bernard Clarke says it will stick its head above the parapet again soon. "We are going to be publishing something before the year end but we are currently working on it," he says. "Prices are likely to keep falling, at least in the early part of the year." Recession The economic downturn is one obvious factor that might help to push prices lower.
The availability of money remains restricted - which is where the key lies
Jonathan Davis, a chartered financial planner at Armstrong Davis, and spokesman for housepricecrash.co.uk says next year reality will kick in, even more than in 2008. "Next year prices will fall by 15-20% because unemployment is kicking in, house repossessions will rise rapidly and houses will go through auctions at previously silly prices - and banks aren't lending," he predicts. After forecasting the end of the house price bubble for several years, his worst predictions now seem to be coming true. "By 2010 prices will be significantly lower than the peak in late summer 2007; if they fall 15% next year then that will take us to 68% of the high point - a 32% fall," he points out. The key factor in the slump so far has been the rapidity with which the mortgage tap has been turned off, as banks and building societies have found they simply have much less money to lend. The industry is keeping its fingers crossed that the government's attempts to bail out the banking system, along with cuts in interest rates, will eventually see more money flow to borrowers. "Things are very fluid - credit is still in very short supply; interest rates are coming down quite sharply; and Libor is also coming down," says Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (Rics). "So the cost of borrowing is falling, but the availability of money remains restricted - which is where the key lies." "And in truth no-one knows when that will change," he adds. Higher sales? The possibility that the mortgage market may free up a bit is hinted at by the Nationwide. HOUSE PRICE Predictions for 2009
It has just raised a further £1.5bn to bolster its finances by selling bonds to international investors, backed by the government's recently launched guarantee scheme for lending institutions. Rics, which is also working on its formal forecasts for next year, points out that there are some indications that sales, if not prices, might pick up next year. "Looking at our surveys, transaction levels do seem to be close to a floor and buyer enquiries are picking up, which is very significant, so there are potential buyers out there" says Mr Rubinsohn. "Prices will slip in the first half of the year and maybe all next year as well, but sales may pick up over the course of 2009." An even more optimistic view comes from Ray Boulger of the mortgage brokers John Charcol who reckons that house prices will stabilise by the middle of 2009. "The significant cut in rates will have a stimulating effect because some will see this as an opportunity to buy," he says. "Prices will drift in 2009, with the rate of decline reducing, and for the year as a whole will be broadly unchanged with a fall of 4% in the first half and a recovery of a similar amount in the second half." "Human psychology and the desire to buy a property is out there," he believes. Insurmountable problem For the moment Mr Boulger is in a minority. The leading economic consultancy Capital Economics has long predicted a big fall in house prices which, in its view, had risen far too high to be sustainable. Its housing spokesman Ed Stansfield is not about to change his tune, and predicts more of the same in the next 12 months. "There is not much evidence that the mortgage market is freeing up so I think we will see another 15-20% off prices in the coming year, so a one-third fall will have happened in just two years, reflecting the deterioration of the economy in the past year," he says. "Potentially base rates coming down may spark a revival of buyer interest, but the scale of the problem is beyond the government and I don't really think there is anything it can do," he adds. What about those efforts by the government and the Bank of England to make life a bit easier for banks and their borrowers? "Whether sentiment can be turned round when the chancellor and the governor of the Bank of England are saying there is a recession on the way is debatable," he says, pointedly.

Reserve Bank of Australia to cut mortgage rates again in time for Christmas

The Reserve Bank of Australia's board will be cutting mortgage interest rates deep again for Xmas
Governor Glenn Stevens said board should consider up to a 75 basis point to a 1.0 percent rate reduction.
The board decided to cut rates by 75 basis points, taking official rates to 5.25 per cent, in light of the continuing poor conditions in financial markets, the significant deterioration in the global outlook and the likelihood of inflation falling.
"Given the changing balance of risks, there was an advantage in moving the setting of monetary policy quickly to a neutral setting," the RBA said in its board minutes.
Economists said they expected the RBA to move to an “expansionary setting” next month as it tried to shield the economy from the global financial crisis which has already dragged several countries into recession.
Commsec economist Savanth Sebastian, who expects a 50 basis point cut next month, said: “The move to a neutral monetary policy setting has been achieved quickly. However the case for further substantial rate cuts remains.
“The global economy continues to weaken and a stimulatory monetary policy setting will be required to combat the weakness in retail spending and housing.”
Westpac chief economist Bill Evans said the RBA’s desire to move quickly to a neutral cash rate suggested a cut of at least 75 basis points in December.
“Whereas neutral may have been around 5.5 per cent in previous cycles, we assess that it is now around 4.5 per cent, given the incomplete pass-through of RBA rates to household and business borrowing rates,” said Mr Evans.
“A decision to push rates to neutral or below as quickly as possible seems prudent in the current circumstances.”
Financial markets price a near-certain bet of a further 100 basis point cut at the RBA’s December 3 meeting. A cut of that magnitude would reduce official rates to 4.25 per cent, the lowest level since the aftermath of the September 2001 terrorist attacks.
ANZ economist Riki Polygenis, who expects a 50 basis point cut next month, said: “The use of the word neutral in reference to taking the cash rate to 5.25 per cent is the largest clue contained in the minutes regarding the outlook for monetary policy.
“On the RBA's latest forecasts, there is a clear case for monetary policy to move to an expansionary setting.”
The minutes revealed board members believed recent reductions in borrowing costs, the weakening Australian dollar and the federal Government's $10.4 billion stimulus package were insufficient to shield the economy from the global financial crisis.
“The marked deterioration in global financial conditions over the past couple of months ... was likely to have a significant effect on business and consumer sentiment,” the minutes said.
“This would probably lead to a significant curtailment of planned investment spending and caution on the part of households.
“Members agreed that a further sizeable reduction in official rates ... would enable a further meaningful reduction in rates paid by borrowers and could assist confidence among consumers and businesses.”
While inflation remained above the central bank's target range of 2-3 per cent, the sharper than expected slowdown in domestic and global growth along with lower commodity prices would see inflation to start to fall soon.
As such, the board members decided a “further size-able reduction ... would strike the right balance between the need to return inflation to the target and the need to reduce the risk of an unduly sharp weakening of demand”.
The RBA has become increasingly bearish about the outlook for Australia.In its November monetary policy statement last week, the central bank cuts its forecast for growth in fiscal 2009 to1.5 per cent from an August forecast of 2.0 per cent.
The projections undercut the IMF’s forecast for 1.8 per cent growth and the federal Government’s prediction of 2.0 per cent growth.
The domestic economy has been slowing along with the rest of the world, with several major economies now in recession.
The euro-zone, Japan and Britain have officially entered recession and many economists already believe the United States has slid into recession.
A meeting of the Group of 20 industrialised and developing countries in Washington at the weekend, which was attended by Prime Minister Kevin Rudd, pledged to work together to restore economic growth.
Leaders vowed to improve supervision of financial markets and reform the IMF and World Bank.
They also urged governments to inject more money into their economies and lower interest rates to stimulate growth.

Will house prices rise in line with the First Home Owners Grant rises.

Those of us who have lived through two, now three first home buyers incentive schemes know two things that most people don't. The first is that putting money into first home buyers pockets is like spraying petrol into a car engine. When the fire is burning you will get a massive acceleration, more maybe than the energy you put in. When you do the same to a sluggish or dead engine, you will flood the engine and kill the spark.
The first home buyers have spoken in their silence. The engine is dead, and its flooded.
It needs to be stripped down and over-hauled. Its sick and doesn't do the job it was intended to do.
Adding supply side demand [by giving incentives and cash to potential first home buyers to an inefficient/ housing market] may drive the market on, but it will not address the core issues.
The core issues are that banks put their self interest before their customers and won't pass on rate rises, and must be dragged kicking and screaming to do so, and that the new home market is geared to second and third home markets, and in doing so has become inefficient in building new home stock.
The result is that the average age of a first home buyer is nearly forty in Australia, [over forty in the US], and the home builders of Australia and America focus on where the money is, the second, third and fourth home buyer.
These people want to get it right, mostly for a couple and a dog, and take their time to design and decide, two reasons why we are building bigger and bigger homes for less and less people.
I have worked in the new home building industry in the 1980's, the 1990's and the 2000's up to right now.
The last month I was AV Jennings in the mid 1988's I sold 7 homes [I averaged 4 homes a month.] The average was 3 sales a month in the 1980's
The average for the 1990's was 2 sales a month for the industry.
By 2000, the average was 1.5 home sales a month per new home sales.
By 2008 this was 1.25 home sales a month per month and falling fast. Many builders have display homes where they can't get home sales consultants to work or they have decided not to open because of their "graveyard status". Many builders have display homes they can't sell.
The sales training given these days is better than in the 1980's and the sales people are more professional, and the urgent need for accommodation for families is dire. So why aren't homes being built?
There are many reasons, but the big one is that first home buyers want a home three times the size they need and twice the size they can afford, and State and local Governments are addicted to money they take in the form of fees and Stamp duty from land developers, home builders and their suppliers, and home buyers generally and new home buyers in particular.
This makes the homes that first home buyers are looking at, at least $100,000 more than they would be, and paying off a mortgage that is $100,000 bigger than it should be may get the banks rubbing their hands, but is making first home buyers reluctant to get into debt that deep for a dream that can become a nightmare in an unclear future.
We need to stop allowing Local councils and state governments dependent on bleeding new development and building projects.
So back to the original question.
Will the house prices rise by the size of the grant increase?
I don't think so. Not this time. In the 1970's it did because The new home builders have become niche suppliers to second, third and fourth home buyers, not first home buyers. The incentives are still too small and don't compensate buyers for the GST, let alone the ripoffs mentioned.
Land supply to Developers needs to be controlled by the Government, as developers and builders have not been meeting the markets needs for years, and land developers use deceptive marketing tactics that manipulate the markets and make land prices artificially high, under the guise of market forces. They buy raw land then hold it. They should be taxed out of doing this. They deliberately hold land from sale to give the appearance of scarcity, when land is in fact abundant. They tell customers that they only have three lots available when they have 15 or 50 available. The run sham auctions. They put sold signs on lots that are not sold.
If Governments acquired and banked residential land and created a competitive development industry first home buyers could see a new home price halved.
The truth is a block of dirt to build a home on should not have to cost $300,000 in the middle of nowhere, but it does on the Gold Coast, and in many areas of Australia.
It time for a breakout of the trend that has gripped Australian residential building and it time for a new deal for the smarter first home buyers that want that new deal.
First home buyers no longer want to get across the line, because they are smart enough to know that they are then the proud owners of a 30 year mortgage. That the mortgage is bigger than it should be should be concern for everyone.
Rick Adlam is the founder of the Australian Mortgage Exchange and Mr Mortgage

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