House Prices Rise -- The Auction Index
I was recently pointed in the direction of auctions from several
different sources. First, I noted that the auction houses were full to
brimming with properties for sale after a somewhat lean year last year.
That could have been a result of slow sales, with people turning to the
auction house in desperation. That turned out not to be the case as I
will show you in a moment.
Then there was the news that house prices were rising and the
newspapers were full of the news that people like me were being proved
wrong, and house prices were set to boom. After over forty years of
being right year after year that came as a rather amusing eyebrow
raiser. House prices about to go through the roof when mortgage lending
was constrained, and incomes were declining? Someone's got to be
joking, haven't they?
Then I heard of a seminar about buying properties at auction. This was
supposed to be the new way to buy properties because that's where the
bargains were. So I had to check this out.
For those of you who haven't been following my writings for very long I
need to explain that when I was a kid at university I started producing
various reference tools to help me understand how housing markets
worked. I was always interested in real estate, and also in maths, and
this led me to start creating a series of tools to help understand how
housing prices moved.
One of the tools I developed was the auction index. This was meant to
be a predictive tool. Too many analysis tools are historical, they show
what has happened, not necessarily what will happen. Part of the raison
d'être of the auction index was to show what would be happening
in the main market a few months down the road. Auctions are fast track
sales mechanisms, and the turn-round time is usually four to six weeks.
The more traditional sales mechanisms take three to four months, so if
I could work out what was happening in the auction room I would have an
idea what was about to happen in the wider market.
I worked out a tool for analysing the data I had, and I structured it
so that I could tell whether the market was under-valued, fairly
valued, or over-bought.
The system I used produced a set of numbers. The numbers 0-10 showed an
under-valued market; 11-20 showed a fairly valued market; 21-30 showed
an overbought market; and any figure above 30 showed a market that was
dangerously over-valued and unsustainable.
I have not been producing an auction index recently because the housing
market has been in the doldrums, and that has been obvious to anyone.
However, with the latest protestations that the market was about to
surge forward I had to check the figures.
My opinion is that estate agents and pundits are talking their book.
The housing market is moved by the availability of money, nothing else.
Money is not increasingly available so markets should not rise
appreciably. The affordability index (something else I invented during
my late teens) also shows that house prices are close to their highest
comfortable range. So what does the auction index show?
I must admit to being rocked to my boots at the results, so much so,
that I back-traced them six months. Here are the results.
The figure for auction houses covering the whole of the country is
26.9, which again is well into overbought territory.
For a country which is teetering on the edge of recession these figures
are absurdly high.
What I have noticed is that some auction houses are experiencing
exceptionally high levels of price rejection. There are cases where
auctions are experiencing half, or even two thirds, of the houses
offered not reaching their reserve price.
My conclusion is that prices have to fall back. This mini-boom we are
being told about must end in tears. Now is most definitely not the time
to start investing in UK real estate.
Just look at these excerpts from some auction results charts. More than
half the houses simply aren't selling. One auctioneer is trumpeting a
great result, "another outstanding day", when over 45% of the
properties on offer didn't sell.
I think we need to relax and take another dose of reality.