Hate to say I told you so but...
I am no economist, but back on 19 December 2006 I wrote an EDP24 blog on the precarious state of the housing market - for which I received an equal mix of abuse and ridicule from various supposedly better informed people (not least from a couple of estate agents who are currently looking for new opportunities but who assured me at the time that I simply did not understand that demand far outstripped supply and that I was crazy not to buy before Christmas). The blog was called "Mis-allocation of resources" (the proof is here http://new.edp24.co.uk/cs/blogs/adman/archive/2006/12/19/828779.aspx) and in it I said:
"There seems to be increasing evidence that the property market in the UK is badly out of kilter with earnings and yields (it is now possible to rent properties for between a half and two thirds of the monthly cost of the mortgage you would need to buy the property). Unfortunately this seems to be driving a massive mis-allocation of resource amongst retail investors who are exposed through ownership of their own homes, second homes, buy-to-let properties, and property unit trusts as well as hidden property investments held in pension funds. The longer this goes on the bigger the bust.
If further evidence of a market failure were needed, there was a report on C4 last night [18 Dec 2006] that up to half of all new build properties in places like Leeds and Bradford are being kept empty by their new owners simply so they can sell them on as vacant properties for a profit - that means they are currently prepared to forgo months of rental income (and presumably, in some instances, fork out on mortgage payments) in the hope of a capital gain from a ready buyer. This is highly speculative strategy that might suit short term momentum investors in the equity markets but does not seem sustainable in the long term property market. As William Rees Mogg recently pointed out in The Times, house prices have peaked at 6 times average earnings on 4 occasion since the war - apparently on three occasions prices then fell by 20-30% back to a long run average of 3.5 times average earnings - we have apparently just reached the fourth occasion and the question is now "will history repeat itself?"
The problem appears to lie in perception (that prices will always go up and that costs of ownership are low) and in restricted supply (this despite the property companies holding 4-5 years supply of planning consents, according to the Royal Town Planning Institute)."
Like I say - that was written in December 2006 (I sold my London house in March the same year because the rental value had fallen so far behind the apparent market value that even I knew something must be wrong - it wasn't about being clever it was simply about realising that the sums just didn't add up). For a while, I grant you, it looked as though 2007 would prove me wrong and the estate agents right - but, being a keen reader of the Economist, I was already aware of the growing problems in the now oh-so familiar sub-prime market and it seemed clear that we would not escape the contagion.
Now, early in 2009, some pundits are hopefully looking for green shoots of recovery in every statistical anomaly. Unfortunately I think they are looking too soon. In fact looking forward and still looking at relative value of renting and buying (plus the credit crunch, rising unemployment, a shrinking economy and the mortgage drought) I reckon the market has some way yet to go and think Roger Bootle's prediction of a 35% fall from peak to trough looks about right (although it may overshoot even this pessimistic prediction) - so another 10-15% to go this year at least. And then a long, slow recovery - which is why I am not rushing to buy anytime soon.