Two LSE economics professors warn of 40% property collapse
The UK housing market is on the verge of a 40% collapse, according to two leading academics. Paul Cheshire and Christian Hilber, both professors of economic geography at the London School of Economics, warned the market was due a significant correction in house prices and this will be prompted by two factors – Brexit and a drop in real wages as inflation rises. They also warned that an extended and severe downturn is more likely than a short-lived and mild one if Brexit leads to recession.

– UK house prices on brink of massive 40% collapse

– UK at ‘edge of worst house price collapse since 1990s’

– Two leading economists warn of property crash

– “We are due a significant correction in house prices”

– Brexit and wages failing to keep up with inflation to trigger collapse

– Trend starting in London before fanning out to rest of UK

– UK homeowners unconcerned – 58% expect prices to rise

– Over 1 million mortgages under threat in UK

– Concerns of return of new “negative equity” generation

– Huge denial amid recency bias and endowment bias – emotional attachment to expensive things we buy – especially our homes

– Good news for first time buyers – bad news for UK banks and indebted, vulnerable UK consumers and economy



Editor: Mark O’Byrne

Two leading economics professors have warned that the UK housing market is on the brink of a 40% collapse, echoing the early 1990s property crisis.

“We are due a significant correction in house prices. I think we are beginning to see signs that correction may be starting” Paul Cheshire, a professor of economic geography at the London School of Economics told the Mail on Sunday.

The sharp correction or crash may come about due to two primary factors – Brexit and a fall in real wages as they fail to keep pace with rising inflation.

Despite these warnings following swiftly on the tail of recent poor housing market data, homeowners seem unfazed by what the future might hold, disregarding the parallels that are being drawn between today and the run up to the 1990s property crash.

Brexit deals another blow

Professor Christian Hilber and former Government housing adviser, and Professor Paul Cheshire warned that Brexit could be a catalyst for the correction which will see thousands of homeowners plunged into negative equity.

Hilber warned that the crash will not be short and sharp:

“If Brexit leads to a recession and/or sluggish growth for extended periods, then an extended and severe downturn is more likely than a short-lived and mild one.”

Brexit continues to create massive uncertainty. Last week we reported on the Bank of England’s Financial Stability Report which pointed towards an ‘adverse shock’, such as Brexit and how it might ‘may amplify a negative feedback loop.’

Wages fall short of inflation

The Professors also explained how wage growth’s failure to keep pace with inflation could result in a fall in house prices.

Last month official measures of inflation showed it was at 2.9% (although we know real inflation rates to be much higher) whilst incomes climbed by just 2.1%.

The OECD painted a bleak picture of the UK economy back in June when it showed that ‘inflation at 2.7% during 2018 would dwarf wage growth of 1.5% and result in the UK have the weakest real income performance, alongside Finland, of any of its 34 rich member states.’

The situation for the UK economy is not expected to improve as growth slows from 1.8% in 2016 to 1.6% this year and just 1% in 2018, according to OECD figures.

Follow the (London) leader

“Historically, trends seem always to start in London and then move out across the rest of the country. In the capital, you are already seeing house prices rising less rapidly than in other parts of Britain,” Cheshire told the Mail on Sunday.

This falls in line with our coverage last week of the weakening of prices in the London housing market. In the same week the Council of Mortgage Lenders said the housing market had ‘stalled’ and that in May over 75% of houses in London sold for less than the asking price.

In contrast an ‘ex-Bank of England guru’ predicted last week that we should not worry about the recent weakening in the housing market. David Miles, professor at Imperial College London, somewhat complacently told the Telegraph:

“The conclusion that I draw is that it is not implausible that house prices, which have become very expensive relative to people’s incomes, instead of over the next 30 or 40 years reversing that to go back to where we were in the 1970s and 80s, either stay as expensive as they are right now relative to incomes, or conceivably, unfortunately, rise further.”

With mixed predictions from experts and mortgage rates still very low, is it any wonder that we are seeing little reaction from homeowners themselves?

A petri dish of market emotion

Despite evidence showing that house prices are coming down, inflation is climbing and incomes are falling a Halifax survey shows that 58% of people agree with Prof. Miles and expect the average property price to rise in the next 12 months whilst just 14% expect house prices to fall.

According to the Council of Mortgage lenders there are 11.1 million mortgages in the UK, with loans worth over £1.3 trillion. With that many stakeholders in the property market is it unsurprising that they fail to believe times are taking a turn for the worst?

The confidence of house market participants seems to come from a place that is unaffected by major issues such as affordability and political instability. Instead it is a market psychologist’s petri dish of examples of emotional biases.

Instead of looking at inflation rates, incomes or Brexit worries homeowners are boosted by the likes of recency bias and herd behaviour – they forget the damage of the crash in the 1990s or the booms and busts exist at all instead remembering the most recent good times of climbing house prices (recency bias).

We saw this in the 1990s when the housing market crash of the early-1990s followed a housing boom in the late 1980s. At the time very few of the so called experts predicted the crash and most denied it would happen – even as it began to happen.

This recency bias is spurred on by the local herd (estate agents, parents at the school gate) telling them that house prices should be this high and that the area is desirable (confirmation bias).

All of this feeds into endowment bias – we place a higher value on an item that we own ourselves and we get emotionally attached and vested in things we personally own.

Our homes are more often than not the most expensive things we will ever own, to imagine it will be worth less than we paid for it, is rarely something we can bring ourselves to consider.

Confidence boosts equity release schemes

Endowment bias feeds into the minds of those who are looking to release equity from their homes.

The number of people who have chosen to release equity from their homes has climbed 72% so far in 2017, compared to the same period last year. According to Responsible Equity Release research this is to ‘cover pension shortfalls, prop up savings accounts hit by low interest rates and pay off mortgages.’

It is in the South West of England where homeowners are really taking advantage of the high house prices. More than four times (357%) more equity has been taken out of 2017 to date, in the South West, compared to last year.

All of these people who are either stepping up the ladder to a bigger house and therefore bigger mortgage or are releasing equity from their homes are clearly choosing to ignore the many warning signs.

Conclusion

Whilst Brexit and inflation threats appear to be the stuff of media hype the past and the history of property bubbles should not be ignored.

The LSE professors have drawn parallels with today’s potential crash and that we saw in the early 1990s. That very crash saw house prices fall nearly 40% over six years and sent over one million people into negative equity.

Often economic downturns hit households hard because of their uncanny ability to believe these things won’t happen to them. We no longer live in a society where people prepare for the worst.

We have been encouraged to believe the boom times are here to stay and the bad times are just a minor blip, which may or may not happen.

Unfortunately that results in poor and damaging financial decisions, such as leveraging you and your family to the eyeballs when it comes to buying a house or releasing equity in your family home.

Homeowners would be sensible to open their eyes to this currently uncertain and unsustainable situation and take the necessary precautions. These include paying off mortgage debt and reducing exposure to property and risk assets in the UK.

Prudent diversification and not having most of or all your eggs in the certain baskets remains the key, as does having an allocation to physical gold to hedge the growing risk of a property crash.

News and Commentary

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U.S. Mint’s 1st-Half Sales of American Eagle Gold Coins Weakest Since 2007 (Reuters.com)

North Korea says intercontinental ballistic missile test successful (Reuters.com)

Longest squeeze on household incomes since 1970s – ONS (Independent.co.uk)

Can the Bank get Britain to kick its cheap credit habit? (TheGuardian.com)

Nasdaq Triggers Market-Wide Circuit-Breaker As AMZN “Crashes” 87% After-Hours (ZeroHedge.com)

Saudi-Qatar rift has elements of world war potential (Gefira.org)

No ‘shock’ if stocks fall 25% and gold soars 50% by October – Ron Paul (CNBC.com)

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