Watch out: the housing market is about to turn back down

House prices slump is over’ screamed a recent Daily Express headline. Nationwide had just reported the first annual rise in house prices for 19 months, with prices up 2% year-on-year in October.

Meanwhile, the most recent Rightmove report shows that the average asking price in London jumped 6.5% to £461,157 in the four weeks to 10 October, sailing through the high of £412,731 set in November 2007. Asking prices are also rising across the rest of England and Wales.

And while transactions may be low, bullishness is here once again. A Rightmove survey of more than 30,000 people found that just one in ten believed prices will be lower a year from today.

That’s funny, because I think just the opposite. The next leg down in housing could be right around the corner. Here’s why…

House-builder stocks anticipate the housing market

Below is a long-term chart of the Nationwide house price index (blue line) versus the share price of Barratt Developments (LSE: BDEV) (red line). As probably the UK’s best-recognised builder, we will use it as a proxy for the house-builders. As you can see, it made a low in early 1992, re-tested that low in mid-1992 and by 1993 it was in a firm uptrend. However, as the Nationwide data shows, after the crash of 1989-90, the UK housing market didn’t make its final low until 1994-6, by which time Barratt had long since broken out.

As you can see, Barratt saw some volatility in the late 1990s, coinciding with the Asian crisis. It weathered the dotcom bust in 2000, then alongside the other UK builders, it really began to take off, before finally peaking in February 2007. This was some six to nine months before our housing market peaked in summer-autumn of the same year.

So the house-builder stocks – and it wasn’t just Barratt, but Persimmon, Bovis and the other majors too – anticipated the housing market. (I would like to thank the trader Michael Hampton of www.globaledgeinvestors.com for first alerting me to this invaluable leading indicator).


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Now, if we look at the more recent stock action of the builders, we can see that they made their low in late 2008, and began creeping up after that. In March, things began to accelerate, and Barratt broke up. But it wasn’t until several months later that the reports of revitalised activity in the housing market filtered through, and house prices began to tick back upwards.

Why the housing market is about to turn down

So why do I think the housing market may be about to turn down once again? Quite simply, because the builders have turned down. The stock market made a high on 23 September and then a higher high on 15 October. The builders, however, appear to have put in a top on 9 and 10 September (see chart below – I’ve added Persimmon (LSE: PSN) (green line) and Bovis (LSE: BVS) (blue dotted line)), and have been gently establishing a downtrend ever since. It is still early days, but that does not portend well for the housing market.

On top of that, Barratt announced a rights issue. The fundraising was announced as the group reported a loss of £486.6m for the year ending June 30, compared to a profit of £86.4m a year earlier. Gulp.

Alastair Stewart, analyst at Investec Securities, said he suspected that Barratt would use the funds to reopen existing sites rather than buy more land. He continued to rate the shares as “sell”.

“We believe that further writedowns could follow after an issue and that Barratt and others [in the sector] could be back to the market in the mid-term for further equity issues, since balance sheets remain under-strength to fund genuine growth.” In other words, they still have too much debt and still aren’t making enough money.

It’s not just Barratt. Rival builder Redrow has also announced a rights issue. These companies are to be commended for raising money while the market is strong. But, as Michael Hampton says: “The big fund-raisings and price erosions in builders’ shares should be a clear sign that all is not right in the world of UK new home building”.

Normal practice has resumed – that’s cause for concern

So any former housing bears who are considering throwing in the towel at the strength of this rally in housing should refer once again to Jean-Paul Rodrigue’s ‘Main stages in a bubble’ chart (see below). In fact, every investor should blow this chart up and put it on their wall.

House prices are rising once again, bullishness is back, estate agents are running low on stock, and the practice of gazumping has returned. In other words, ‘normal’ practice has been resumed. Look at the main stages of a bubble above and see what happens shortly after things ‘return to normal’.

No indicator is 100% reliable, of course. The builders have made misleading breaks before – such as in 2002 and 2006. But I reckon that the next leg down in housing is just a few months away. Perhaps we’ll start to see it as those ultra-cheap tracker home loan deals start to expire and monthly repayments start to increase.

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32 Responses

  1. 05/11/2009, iain bramwell wrote

    So Dominic,where on the ‘main stages’chart is gold? judging by the ‘sell your gold’adverts on TV,I would have thought pretty near the top of the bull curve??

    I sold a lot of my stock last year when there was a brief recovery (May08) so I missed the serious down turn.However,I also missed the even bigger recent upturn as it is still in cash(reco by Moneyweek).

    Your observations are always interesting and the charts facinating.However,they are of limited use to the average Joe like me if you dont know where you are on the chart at any given time.

    I,m starting to believe,apart from VERY longterm value investing,the only people that make serious money in the markets are those behind the scenes that have the power to CAUSE the ups and downs as they know what is coming for sure.JP Morgan for example!

    Your thoughts?

    Iai

  2. 05/11/2009, Dr Ray wrote

    Iain,

    Surely “buy gold” adverts would mark the top of the bull not “sell gold”.

    The sell gold adverts suggest that the smart money is moving into gold and the not so smart is being enticed to sell it.

  3. 05/11/2009, Peter Kellow wrote

    From the first comment: “limited use to the average Joe”. I would have thought that indications on the future of house prices is of great use to “the average Joe”

    Thank you, Dominic, for pointing out a relationship that I have not seen before. An invaluable article.

  4. 05/11/2009, Peter Kellow wrote

    From the first comment: “limited use to the average Joe”. I would have thought that indications on the future of house prices is of great use to “the average Joe”

    Thank you, Dominic, for pointing out a relationship that I have not seen before. An invaluable article.

  5. 05/11/2009, Rick Pearson wrote

    I have no qualifications as an economist or any financial training BUT! I am an expert at surfing the Internet for information. I am 100% sure that we will see a large downward trend in house prices soon, most likely Jan 2010, my opinion is based on the law of cause and effect. This recession and collapse of the housing market (the effect) was inevitable as it was built on greed resulting from “dodgy” lending (the cause). Recession happens to teach us lessons, to show us that were basically on the wrong track and we had better find a new route.
    Well, its obvious we have not learned the lesson yet, were back to all the old tricks which were the cause, so the effect WILL still have to be faced. House prices are over inflated and must fall, criminal lending has to stop, employment must grow before sustained confidence in the market can be established, annual wage rises will have to “get back to normal”.

  6. 05/11/2009, Alex wrote

    Well with taxes rising, oil and hence petrol and heating costs shooting up, rising unemployment ( about to start hitting the regions especially as Government spending finally has to fall ), and interest rates certainly at there bottom ( and set to rise ). It’s hard to see any factor which can sustain UK house prices as 10 times the average income.

    I certainly doubt the banks will be in the mood to expand there morthgage books materially for many years to come, mainly because the market for mortgage bonds has all but dissapeared.

  7. 05/11/2009, DOMINIC FRISBY wrote

    Iain, in terms of gold I would say we are somewhere towards the end of the ‘awareness phase’, with 2008′s crash being ‘the bear trap’. The stealth phase is over. We are seeing signs of the mania, but full-on, maniacal gold fever is a way off.
    As for the stock market,I still believe they are ‘traders’ markets.

  8. 05/11/2009, Scott wrote

    Very interesting article dominic. I have been expecting the housing market to turn negative again at some point, it just seems to be taking an age to do so.

    Could a trigger for this be when the quantitative easing is stopped by the bank of england? Could the banks then start being more restrictive again and hoarding any cash they have and reducing lending for mortgages?

    Unemployment still seems to be going up, along with the future tax rises for us all, rising stock markets that just seem to ignore reality, etc… It all seems to be building towards another slump just like last year, and housing could indeed be hit very hard.

  9. 05/11/2009, Alex wrote

    Hi Scott, one thing that will keep lending volumes restricted is the state of the market for mortgage backed securities. Without a good secondary market for mortgage bonds lending will remain very much restricted. And that will sooner or later push house prices back down.

  10. 05/11/2009, Retired of Lowestoft wrote

    I don’t think house prices will drop until after the election as everything is being done to prop up the housing market and the economy – Gordon Brown would not stand a chance of being elected otherwise. If house prices actually drop what would the losses be like at Northern Rock/RBS and others? Where would the Pound be? Would the IMF be moving in to bail us out and force us into joining the Euro?

    A good part of UK economy has been based on the artificially high price of housing, getting people to feel better off. If this drops it will be a nightmare for retirees and anyone subsequently trapped in negative equitiy.

    I enjoy your articles Dominic and you are not far out on your calls re the price of gold. When do you think precious metals/mining shares will start their move up?

  11. 05/11/2009, David wrote

    In the last 2 weeks the FSA released a mortgage review report which recommends making the banks fully responsible for establishing affordability for anyone looking to borrow from them.
    Very sensible but the immediate reaction to this has been that all the banks overnight now require evidence of income. Borrowing at present is not easy when you are employed and have payslips but if you are self employed as per a third of the population you will now need to supply evidence of your income for the last 2/3 years. With most of the self employed having a reduced income due to the recession they will now struggle to obtain a mortgage. Property prices for the last 10 years have been increasing on the back of easy credit which has now gone. Just wait until interest rates start to rise then you will see panic. If you think we have seen the bottom for property prices think again.

  12. 05/11/2009, Tony wrote

    The sell gold adverts is aimed at the non-investors, those who fancy some ready cash. These buying companies simply take advantage of the general high status of gold and charge a large fee so they get a good margin out of it, and they can in turn sell it to those gold bulls who think that trees grow to the sky. They are just manufacturers, they have to buy in raw material. Strangely though they are taking away value from the raw material rather than adding to it.

    We live in a world of imagined value, the things that sell for the most are generally the least valuable to society. Eg food and gold. I think I know which has more value to me, of course supply and demand changes perceived value, lets hope food supply doesn’t change too rapidly.

  13. 05/11/2009, Carol wrote

    Thanks for confirming what I’m seeing in my own area (just outside Greater Manchester).

    After a rush of houses onto the market in the past two months, very few sold signs are appearing. Land Registry data shows *three* properties changing hands in Sept 2009 vs. twelve in Sept 2007. The Rightmove listing feed shows vendors cutting asking prices anywhere from £5-20,000. Even so, still few sales.

    So much for the “return to normal.” I call it “sell it while you can” (or can’t). While we’ll benefit from the coming fear and capitulation, I’d prefer that people simply view houses as we do — as a place to live.

  14. 05/11/2009, Amar wrote

    Dominic,

    Very interesting article. Does Fred Harrison agree with your scenario? I think also thast we are at the ‘Back to normal’ phase. I regularly keep in touch with Dr Rodrigue, and he says the same thing as well. He is saying that all of this debt which has been accumulated has to be defaulted on in some way or another. The trigger for this will be reverse quantitative easing and higher interest rates. QE was never meant to save the housing market, it was meant to save the banking system. Giving the system enough time to get back onto its feet again. Then the £200 Billion will be taken out of the system as to avoid hyper inflation. Those people who had cash are about to lose all of their investment because the cash buyers are the most gullible at this stage of a collapse. They will be in panic mode.

    Just one question: When are we expecting the housing collapse to really take hold in a big leg down? Jan Fab or March ?

  15. 05/11/2009, Ed wrote

    Therefore, looking at the timescale on your chart, we should expect housing to remain stable from now until early summer, and then start a long and hard fall. We shall soon see……

  16. 05/11/2009, James wrote

    I have a question regarding the ‘Main stages in a bubble’ chart, namely, whether we are the point of only just entering the ‘mania’ stage, or indeed, if we could possibly be set for the ‘first sell-off’ bear trap?
    Your views and opinions would be welcome!

  17. 05/11/2009, Alex wrote

    The ironic thing is that in attempting to support house prices Governments have managed to double of the price of oil by flooding the world with cheap money. This means that fuel and other necessities of life are going up in price even as wages are static or falling.

    To add insult to injury we are then told that taxes are going to have to rise to meet the cost of all the spending that our own Governments have done in order to keep houses un-affordable and to increase the cost of living for us all. In the meantime houses still aren’t selling anyway.

    As a comentator over on Bloomberg has said today….the world has gone well and truly mad.

  18. 05/11/2009, Mike (has left the country) wrote

    Yes the world has gone truly mad! I doubt it is madder anywhere than good old Great Britain.

    We are still in a huge bubble with house prices, stock prices and general spending.

    To use a metaphor the same people who blew the bubble up in the first place are still puffing away, in fact harder than ever because now for many of them their solvency depends on keeping the illusion of growth alive in the minds of the herd. I’m afraid puff as they might the bubble is impossibly large and can’t be sustained. Double dip is coming and this time its going to be bad. For example in the housing market, there will be little money, little demand yet a comparatively high level of supply of defaulters caused by high unemployment and dropping off fixed cheap rates of late 2006 / early 2007.

    I think we should consider the prospect of a 40% drop in house prices, a 25% drop in stocks.

    Parachutes at the ready! ;-)

  19. 05/11/2009, verteus wrote

    Some observations in support of DF’s view:
    Historically, when house prices fall, they tend to fall for 5-6 years.
    House prices should be linked to their yield; rents are a direct function of net income
    A handy reckoner for “fair value” is gross annual rental income * 16
    Gold prices historically have tended to peak just before interest rate rises; silver and platinum later in the cycle (I will swap my gold for these when over the next few months)

  20. 05/11/2009, einstein wrote

    does this man actually know what he’s on about?
    perhaps you should hire frankie boyle for tips instead, he’s a lot funnier and may be more accurate. there is no average jo and if there was it would be you.

  21. 05/11/2009, mat jackson wrote

    1) We haven’t ‘fixed’ anything.
    2) The last house price bubble was caused by too much cheap and easy money in the system.

    We looked into the abyss and boy we didnt like it. So Government reprimed the pump with even more cheap and easy money (virtual 0% rates and QE), because the alternative was too horrifying – and election losing.

    A lot of easy wealth was created in the last property upswing and this is now being deployed by people who don’t fully understand the depth of the problem to buy stock as ‘property always goes up’. They think this is the bottom.

    This froth obscures the facts and can tempt even less well versed people into the market – fear and greed, always the drivers. That’s why it seems to take a while to react, the tanker steering effect.

    But react it will.

    Sold my house in spring 07, very not tempted into this market by a long shot !

  22. 06/11/2009, Clipper wrote

    It takes courage to sit out the very recent house price increases but I’m prepared to risk it for the probable long term gains.
    My reasons: in 2010 – Quantitive Easing (money printing) will cease, employment will continue to rise (public sector job cuts), taxes will continue to rise, people will be forced to pay back their loans (as no more reliance on house price rises), banks will continue to demand huge deposits (because they fear negative equity in a declining market) and income verification will restrict silly mortgages. So I’m betting on serious price drops.
    Renting is the way to go!

  23. 06/11/2009, VinceD wrote

    I’d be interested to see your builder trend analysis based on Berkeley Homes rather than Barratt. Tony Pidgley is renownd in the construction industry for calling the market in housing correctly (hence they are sitting on a cash pile at the moment rather than land banks bought at the peak).

  24. 06/11/2009, Bilbo wrote

    House Prices are gearing up for a massive CRASH! as unsustainable, housing stock is appalling, value for moeny is zero, built up on hype and fear. The charts highlight what could be possible. I think likely. The election, the end of the Sugar Rush, Price to earnings ratios, unemployment etc etc indicates time to Hold off buying a house. Dont beliebe that, then go to Right Move and install PropertyBee.com running with Firefox. The Rightmove web site then shows you the prices movements (mainy Down), changes in the attempts to move property and that people (buyers) are now waiting. If the House is good value for money or in a very good location it sells. Naturally as a house is Only worth what someone is prepared to spend…. And what houses we sell in the UK (little boxes) they aint worth tuppence.

  25. 06/11/2009, Mladen wrote

    I agree that prices of properties in UK will go down. My independent research at Housing in UK agrees fully with your opinion.

  26. 06/11/2009, Mladen wrote

    This is the link if you allow it :
    http://www.numbeo.com/property-investment/country_result.jsp?country=United+Kingdom

  27. 11/11/2009, Paul F. wrote

    Discuss the current and predicted trends in house prices in the UK ?

  28. 11/11/2009, Ben M wrote

    Having lived in the US and South America I couldn’t believe the price of houses when I returned to the UK in 2005 – value for money is awful here.
    The media are making the public think that the recent house price rise is a return to norm which in turn seems to be further inflating the housing market. This is surely unsustainable, however, I am wondering what the apparent greater demand compared to supply will do to prices in the long term ….. any comments?

  29. 24/11/2009, Blimey wrote

    Many interesting points in the article (IF you believe Nationwide is truly an accurate and that house builders are honest and socially responsible). Movever, long term trends can only be overcome short term and cycles can not be resisted forever (Even if the Govnmnt thinks £200billion can). The ‘housing market recovery is a mirage and a 40%, 5 year correction is inevitable.

  30. 29/11/2009, RussianFM wrote

    For all those who believe in going against the herd – the virtual 100% pessimism in the replies here say a lot!

  31. 01/12/2009, Rob and Nelly wrote

    What about the prime London market? Will that fall 40% or be sustained by external investors?

    Is another possibility that rather than price falls, house ownership becomes rarer: fewer richer owners with larger portfolios rented to the excluded majority. Could that be politically sustainable? Would the Englishman give up his need to own a castle and the country become a nation of tenants?

  32. 10/12/2009, BrianG wrote

    If you compare Jean-Paul Rodrigue’s ‘Main stages in a bubble’ chart with the index of house prices since 1952 here,

    http://www.nationwide.co.uk/hpi/historical.htm

    it seems as if average house prices are set to fall to their 1996 levels, ie. below £50,000.

    Does anybody believe this will happen?

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