2012 – Year of Crash and Opportunity 132

I predict a very substantial fall in UK house prices in 2012 – and that will be a very good thing.

Average house prices currently stand at over 6 times average earnings. That compares to a long term average since 1945 of under 4, which charts show to be the norm.

People simply cannot afford to buy homes at six times their earnings. People living on average earnings, and paying the high rents such high property prices entail, would take ten years to save one years earnings, which would give them a deposit. They then would need five times earnings (or two and half times joint earnings for a couple) in mortgage. It is with good reason that banks will not lend at that level – it is more than people can pay.

There is a fascinating graph in this BBC report of a National Housing Federation (NHF) study last summer. It shows that the number of households under 30 living in private rented accommodation increased astonishingly, from 30 per cent to 48 per cent, in the bubble years between 1997 and 2009. That is a massive gain to a landlord class apparently very rich in assets -but the value of whose assets is strangely inflated.

This leaves ordinary people stuck in a very unpleasant position. Until last year, I was forced to live in private rented accommodation. My annual rent was about 6% of the nominal property value. I now pay substantially less than that in mortgage interest.

The NHF study predicts that current trends will continue, that the private rented sector will continue to grow, and that house prices will grow 21% over the next five years. But the NHF, who commissioned the study, are providers of rented accommodation and as usual this “academic” study uses assumptions which promote the economic interests of those who funded it.

In fact, I expect the massive decoupling of house prices from average earnings will end in 2012 or 2013 and we will see a major crash in house prices. It may not begin in 2012 – possibly it can be delayed until 2013, but I predict that by 2015 we will see house prices to earnings ratios back to four per cent. And as I see no significant increase in average earnings over that period, that means a fall in nominal house prices of over 40%.

House prices currently bear no relation to the ability of people to buy them to live in. They are like a rock balanced on an apex, requiring only a little push to crash them down. A number of pushes are coming:

– Cuts in housing benefit. The whole rush to the private rented sector has been underpinned by artificially high rents forced up by government payment of housing benefit. I am of course extremely sorry that individuals may be hurt by the implementation of these cuts. I also expect some backtracking as it dawns on MPs that the £2,800 per month does not actually go into the pocket of the Daily Mail’s Sudanese refugee family, it goes into the fat pocket of some Tory landlord. But the housing benefit cuts will reduce returns to landlords and knock house prices.

– Unemployment. The main impact of public spending cuts is yet to feed through in terms of higher unemployment – you ain’t seen nothing yet. Tories like unemployment – it reduces the costs and leverage of labour. 2012 is the year that it will really hit. By the end of 2012, repossessions will be very high. This would always spark a drop in house prices; people have not yet got their heads round what a fall it will be this time.

– Interest Rates. The key factor in balancing that house price boulder has been the lack of any high wind of interest rates. The short term outlook is for base rates to remain real terms negative (which is undeniably true yet strangely almost never said). But that will not last forever either…

The coming crash in house prices is of course going to have a huge effect on the viability of the financial sector, and will join together with sovereign bond defaults in precipitating the fall of the casino capitalists who live on our labour and have the rest of us in their lockhold. Those who saw 2011 as a global year of revolutionary change were only witnessing a tremor before the eruption. I cannot be sure that the crash will come in 2012 rather than 2013 or 2014; but I am looking forward to the new year with genuine hope that a deal of stench will be cleansed.

132 thoughts on “2012 – Year of Crash and Opportunity

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  • Tony

    There must be something to look forward to more than reduction in the value of houses!

    Negative equity will be an immediate consequence for many – not least the banks. Their balance sheets are full of various forms of debts secured on property where the figures will simply be wrong (very wrong) when values drop as much as you suggest. What happens when the basis of a bank like Lloyds’ solvency on paper depends on the asset value backing debt guarantees and mortgages?

    Reduced house prices will be good for first time buyers, but I see more solvency issues for the banks which Messrs. Cameron and Osborne will rush to solve by more bailouts and austerity. The banks are in enough trouble already with dodgy and inadequately secured lending. He who pays the piper calls the tune, and without City funding the Conservative Party will also return to debt problems.

    Happy New Year!

  • craig Post author


    Entirely agree. Only I think the banks crashing is necessary, and the bailouts were a disaster that must not be repeated. Governments won’t be able to do it next time – they won’t be able to raise the money themselves either.

  • larry Levin

    For house prices to fall you need rates to rise, the 7yr gilt is near 1.5%, this means you can possibly get a 7yr fixed mortgage for 2%, Rates cannot rise on the UK because the UK cannot sustain rates above the current low levels,

    Since then, they’ve built up debt. We now have, well we now pay – here’s a horrifying thought – we now pay every day £262 million in interest alone on the debt, and the debt is set to double over the next few years. It’s a frightening scenario.

    John Major, Sunday 14 December 2008

    Also it should be remembered that Buy to let is very very profitable at current house price levels, falling house prices are exactly what the professional investors are waiting for,

  • Dick the Prick

    I hope you’re right but unfortunately I doubt it. We’ve been banging on about this for years over at house price crash dot com and for some insane fucking reason it never seems to materialise. I live in a Northern industrial town with loads of 1900 ish terrace houses which are perfectly decent homes yet they’re building loads of new shitholes on green belt, school playing fields, brownfield etc which are pokey, identical, shoddily built, not linked to shops and ameneties and yet go for about £50k more and they’re being snapped up by utter ejeets; it’s crazy man, fucking crazy. Anyway dude, happy new year to you & yours – hope it’s a good un. (stay out of the woods – hee hee!)

  • Mary

    ….’with genuine hope that a deal of stench will be cleansed.’

    and the cause of the stench from the Houses of Parliament and Whitehall too.

  • John Goss

    If there is a housing crash the people buying up the houses will be property investors looking for ‘nice little earners’ and that gap on the graph between families who own their properties and those who rent will get even wider.
    There is another worry for the coming year, the control of the media. George Galloway is being taken off Sky. His programme PressTV is being removed by Ofcom. It will continue to be available on other satellite providers.

  • Mary

    o/t a bad end to the year for the family of this soldier making a discussion of house prices seem rather irrelevant.
    UK soldier killed in Afghanistan
    The prime minister has indicated he is planning a phased withdrawal of troops from Afghanistan

    A soldier from 1st Battalion the Yorkshire Regiment has been killed in Afghanistan, the Ministry of Defence has announced.
    He was killed by an explosion on 30 December in the Nahr-e Saraj district of Helmand Province while taking part in a foot patrol.
    The soldier’s next of kin have been informed of his death.
    The number of UK personnel killed in Afghanistan since military operations there began in 2001 now stands at 394.

  • harry

    I dont disagree with your broader analysis. But I think you have stopped short of following through with the analysis. Why hasnt housing crashed already? Well outside of London it is already very weak. In London it has been supported by the decline of sterling, and foreign wealth. The overall market has been supported by a tremendous easing in financial conditions which partially offset the tightening caused by the collapse in bank balance sheets.

    If the housing market weakens further, the Bank of England would do its best to mitigate the pressure on the banks by further money printing. Policies will be changed as the pressure mounts, so that we will have to deal with the unforeseen consequences. I suspect that at least some of this pressure will manifest itself in the exchange rate.

  • Rob Royston

    House buying has never been easy. Back in the early eighties we were paying 16% interest rates. The problem now is that prices have been inflated way beyond the properties values by a greedy bubble market scam.
    At the end of the day a mortgaged house should be the mortgagees home. Instead a situation was allowed to develop where the property became a speculative asset. I agree that house prices need to come back down to reflect the real value of the land and buildings. The problem is that a lot of people have loans that outweigh the value of their property.
    I am sure that the government could do something here to allow the houseowner and his lender to overcome this negative equity trap. If an owner has to move and has a £300,000 mortgage but the property is only worth £200,000, then surely it should be possible for the missing £100,000 to be set into a financial device between the government,the lender and lendee, with them all making matching repayments. After all, they all allowed and encouraged this bubble in the first place.
    The lenders would have to increase their rates for everyone but the problem will never go away unless something like this is done.

  • Rose

    And here in well-heeled North Norfolk, as in other nice bits of the country, there is the added insult of second houses most of which stand empty for a good part of the year.Surely it’s greedy to want to own more than one home – you can only occupy one after all.

  • Anapa

    speculation in housing market, that’s what is your problem. Your government should regulate activities of estate agents and middle bankers who are making blood money. Then, local governments should use their tax accumulated monies for the benefit of residents, i.e. by building affordable houses. Instead doing so, they are investing in foreign banks which are becoming bankrupt later on, Icelandic bank experience is a clear message I hope.
    well, anyway, I hope now wars in the new year.

  • Mary

    Whatever everyone wishes for themselves and others in 2012
    One day,
    Youngsters will learn words they will not understand,
    Children from India will ask: “What is hunger?”
    Children from Alabama will ask: “What is racial segregation?”
    Children from Hiroshima will ask: “What is the atomic bomb?”
    Children at school will ask: “What is war?”
    You will answer them, you will tell them: “Those are words not used any more,
    Like ‘stage-coaches’, ‘galleys’ or ‘slavery’,
    Words no longer meaningful,
    That is why they have been removed from dictionaries.”


    Martin Luther King

  • Techno

    I grew up believing that I could rent until I felt ready to buy. In the 1990s people urged me to buy but I didn’t feel ready to take on the debt.
    Now, at 42, I am facing spending the rest of my life in rented accommodation, only ever two months from being homeless. I will also have to live in rented accommodation when retired which will eat into my pension. Meanwhile, my tax money has been used to prop up failed banks, and is being sent overseas to countries like Greece where tax evasion is routine.
    I am disgusted on a very deep level with this situation. But at least I am now aware of how corrupt the situation is and I can alter my expectations and behaviour accordingly. I hope the politicians won’t be requiring my cooperation anytime soon, like being conscripted to fight in any of their [email protected] foreign wars, although I’m probably too old to be a soldier now anyway.
    Keep up the good work Craig. Your blog is always an interesting read even if don’t always agree with your opinions.

  • Abe Rene

    Techno: your situation sounds a bit like mine except that I have the good fortune of a temporary job early next year. I’ve never owned a house, and doubt that I wiil ever do so. Rather than end up homeless or in abject poverty, may I be granted a swift and painless death, and in a state of grace so as to escape final punishment. They don’t call pneumonia the “poor man’s friend” for nothing. 🙁

  • Hugh Kerr

    great stuff Craig you would make a good economist! However I think the London and City effect is keeping house prices high in the South East there are 74 billionaires and 44,000 millionaires living in London many of them nondoms and paying little in tax and buying properties.Still when Scotland becomes independent I will recommend you to Alec Salmond as his foreign policy advisor! happy new year to you Nadira and Cameron Hugh

  • Abe Rene

    PS. But let me end on a positive npote; may it please Providence to grant to Techno, me and other readers in similar situations, some measure prosperity to restore the years that the locusts have eaten, that we not have to worry about cardboard city. 😉

  • Azra

    Mary , Thank you and let’s pray for that…
    Techno and Abe , May you prosper and never be without a roof over your head. My heart goes to youngsters , what a bleak world we brought them into.

  • PhilW

    “The coming crash in house prices is of course going to have a huge effect on the viability of the financial sector, and will join together with sovereign bond defaults in precipitating the fall of the casino capitalists who live on our labour and have the rest of us in their lockhold.” (Craig)

    Its because a crash would have such huge effects that the government (and banks, or is that the same thing?) has put such huge efforts into preventing it happening.

    The question for next year is ‘Can they continue to manage a controlled decline in house prices, or will it all come tumbling down?’ If the market crashes the fall in house prices may be much more than 40%, as values are likely to fall below historic norms given the rest of the economic situation. Defaults will be everywhere, and all banks and building societies of any size will go bust. One hopes that the government is ready with an emergency financial system to keep economic activity going in that eventuality – but I’m not counting on it.

    The crash will not be just the banks going bust and everything else carrying on as normal.

    We need to organise and be ready for a crash – co-operative solutions, not bunkers please!

  • Mary

    Nice one Obomber. Rolled over for the Israel lobby again? All ready to take us into the next ‘theatre’?
    Obama signs Iran sanctions bill into law
    Iran insists its nuclear programme is for peaceful purposes only

    US President Barack Obama has signed into law a major defence bill including tough new sanctions against Iran.
    The law cuts off from the US financial system foreign firms that do business with Iran’s central bank.
    But Mr Obama stressed that he had concerns about parts of the legislation dealing with the handling of foreign terror suspects.
    “The fact that I support this bill as a whole does not mean I agree with everything in it,” Mr Obama said.
    The president signed the law in Hawaii, where he is on holiday. The move comes at a times of heightened tension over the Iranian nuclear programme.

  • Archie

    The reason that average house prices exceed 4 times average income is of course the relentless and continuing neo-liberal attack on real earnings. By any comparative measure other than average earnings, house prices have not increased excessively. The obvious answer to the house price problem, as with the other lack of demand problems in the economy, is substantial increase in real earnings.

  • Fedup

    The nexus of the events driven by greed, and even more greed, have brought about a near disaster for the ordinary people whilst affording an opportunity for the Oligarchs to acquire even more, at lesser prices than in the past.
    Happy New Year everyone

  • Guest

    Craig, mankind has just started to enter into the most gargantuan, horrendous, destructive period in his whole history that will make every evil that has gone before look infinitesimal and you want to talk about house prices.

  • Jon

    @Guest – houses are a human right for everyone. Their associated prices are a direct result of the greed of the elite classes, and so it is right to talk about it, so long as it is not from someone complaining of the drop in value of their rental portfolio!

  • Jon

    A very happy new year to everyone here, and to our host. May the year we are entering be slightly more peaceful and just than the one we are leaving.

  • Guest

    “someone complaining of the drop in value of their rental portfolio!”
    The only thing that I own is my soul.

  • Fedup

    A very Happy New Year to you all and Craig, may this new beginning accompany;
    Justice, Equity, Brotherhood, and Peace to all mankind, and may the darkness and despair of the past be banished, and may natural justice dish out the long over due punishment of those mass murdering evil doers whom have spilled so much blood in the way of gathering wealth. The skulls of their victims are still awaiting their premature deaths yet to be vindicated.

  • anno

    We have, well you have, lost the war in Afghaistan. The least of our, well your, problems is going to be house prices.
    Investors sell like ship rats, before the fall, so it will be controlled demolition of prices accompanied by huge homelessness followed by corporate investment in housing and subsidised renting will then become the norm. Tory dream.
    But in the meantime the vacuous Tories will be forced to make concessions as co-losers abroad which will allow new labour to duck the blame for the war on terror and change the way we live for ever. Ed Milliband is the man to bring back the Hovis to Great Britain. ‘ Do yer remember the ol days, walking back with hot chappattis under yer arm an’ y’could buy a pint of beer without being stuck in prison?
    Islam is coming inshallah. Get yer prayer mats ready, the future of the UK is Muslim, inshallah.

  • nuid

    Happy New Year, Craig and all.
    I think this will be the year of the euro crash, and who can predict exactly what will happen then. But nevertheless, I’m chirpy to see a New Year in. Sláinte mhaith!

  • Peter

    An interesting discussion on housing Craig. The same trend probably exists where I live as well (Australia). For most of our family life we have rented, unable to afford the jump to maintaining a mortgage. I am grateful for at least being able to afford renting while I keep working; this may change when I am forced to retire in five or six years time. You are probably correct in surmising an economic crash in 2012-2013 as much as it must frighten everyone. The economic outlook for Europe and the US seems awful with disaster looming just over the horizon come late 2012. For some time I have enjoyed reading your erudite reflections, so keep going!

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