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| The UK housing market: a bubble about to burst? |
A triumph of hope over reason!
by Extradry Martini
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#1000310
of 3278
 22 Oct 2002
12:52 PM |
Mr LP said:
“I do not believe that a credit crunch will arrive - economic policy today is far too sophisticated for that to happen.”
I think I might frame that sentence!
Let’s take the first part of that sentence. The credit crunch has already begun – investment grade companies are now borrowing 1½% more expensively in medium term (over 2 years) debt relative to interest rates than they were 2 ½ years ago – non-investment grade companies (i.e. the vast majority of the economy) are borrowing at levels far higher. The credit quality of banks has also (unsurprisingly) deteriorated, making them retrench further – it is not a question of whether a credit crunch “will arrive” – it’s already here! The question is whether the mortgage loan market will be immune from it – why should it?
For the second part of the sentence, consider this: In the first few days of the 1929 US stock market crash, investors and the press alike were saying that “organised support” would enter the market and everything would be all right. Any meeting involving more than one large bank was deemed to be clubbing together to buy the stock market on a large scale. One day in September, most of the Wall St. senior bankers plus some from the Federal Reserve were seen entering the offices of J.P. Morgan, and the stock market duly rose - assuming that there would soon be widespread buying. The following morning the banks started selling, not buying – they had met to discuss how to preserve the banks capital and thereby avoid a full scale banking collapse (it happened anyway). The belief that there is a bigger force out there, able to prevent economic disaster, is a common feature of the desperation in the final phase of a bubble.
Let me explain why the second half of the above statement is so ridiculous. I would say that economic policy is currently at its most incapable and unsophisticated to deal with current conditions than it has been in the last 60 years. World economics has revolved around inflation fighting for so long that a post-bubble deflationary scenario (common before the war) has not even been considered until recently – economists have forgotten how to look for it and have few tools to analyse it. Last year there was only one economist in the world with any kind of voice - I repeat ONE economist, Stephen Roach at Morgan Stanley, who foresaw the collapse in global stocks this year. All the rest, again, I repeat – ALL OF THEM – predicted a recovery. So if every economist in the world bar one got it wrong, how on earth can you possibly believe that that there are forces out there that are capable of avoiding a credit crunch? (Again, it has already started so there aren’t!)
He also said:
“To date no one has yet explained how owning outright is a disadvantage”
Outright owning real estate, or any other asset is not a disadvantage. Having debt secured against a asset whose vale is falling is a huge disadvantage if you are incapable of servicing that debt. On top of that, add the fact that the real size of your loan is rising while the value of the asset is falling and you have a real problem - unless you are absolutely sure that your income will stay constant, or even rise, enough over the entire life of the loan. The trouble is that people lose their jobs in recessions – they will have to sell as will everyone that has bought to let. Those with very high amounts of equity will of course not have a problem, but they are few and far between. Current (record) levels of household debt are astronomically high and most of it is secured against property. A lot of this has come from the huge increase in “equity release” loans and buy to let mortgages – the British consumer is leveraged up to the hilt. The problem is that he, like Mr. LP, does not understand the risks or chooses not to think about them.
Matt d
… makes the very good point that the tech market was overvalued in 1998 and still went up. To elaborate his point a bit further – the market can still go up, it doesn’t make it any less overvalued now. If you had sold tech stocks in February 2000 when the Nasdaq was at 4000, you’d have done well because it is currently at around 900 (and on its way to 400 in my opinion). But before it started falling a month later, it went to 5000 a rise of 25%. Did this mean that the person selling at 4000 was wrong because it went up another 25%?
A good rule is this: If you think that your debt burden would be too high if it was 20% higher then you should be repaying it now – if that means liquidating assets now while you can then so be it.... |
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Rent v Buy
by Horsefly
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#1000309
of 3278
22 Oct 2002
12:10 PM |
For a potential first time buyer working in London, renting has the following benefits over buying; it is easy to move if necessary and it is worry and maintenance free.
Despite these benefits, in my experience renting costs about HALF as much as buying on a month by month basis, when owner maintenance bills are included.
Todays mobile workforce know that they may be working in another city in a few years time, and there is no incentive to buy when renting is looking so attractive.
As the pressures of speculation mania and the DIY craze die away, the London and Home counties market is set to deflate like a released balloon. |
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Houses,homes and cars.........
by Shareholder
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#1000308
of 3278
22 Oct 2002
10:54 AM |
Well after reading the last few posts......
The houses we buy to live in are our homes. If they are also a good investment , then so much the better.
Houses that are bought as an investment are a business, even more so when they are rented out on a lease. Unfortunately as I said before the revenue considers them an investment for IHT purposes and a business for rental income. They want it both ways!! Buy another type of business as an investment and many are not subject to IHT!! Any comments from the financial experts amongst the contributors would be interesting???
Now we buy our "homes " because we like them and want to live,relax and be happy in them.
We buy cars for a similar reason and they are the worst investment, they lose money all ways, even just standing and not being used.
So what about house prices and home prices?
It is speculators that are driving up the prices. People trading in property. I know people who keep moving and buying run down houses, then improving them and selling.
Now private residential homes are free of tax. Trading is not. I know one guy who bought a succession of houses and did them up while his wife worked, the revenue did him for tax on the profit and sent him bankrupt when he couldn,t pay!!!!!
While the scroungers live off all the rest of us!!! |
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The Scream - a quick response
by Martin H
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#1000307
of 3278
22 Oct 2002
09:11 AM |
The Scream.
You quote in your post the first part of which is addressed to me:
>>Shareholder tends to know his bananas. You cannot blame the Conservatives when you don't know whether or not the Labour party would have done the same in the same circumstances.<<
The inference in the first statement is that I don't!
Quite probably Labour would have done the same, but it was the Conservatives who initiated the policy. That is inescapable.
When you have had a mother with dementia, you get to know what can and cannot be done. I could fill this forum with innumerable pages on just the basic requirements that everyone should know, but most don't or don't care to.
We could afford to keep my mother at home. Most people have only one major asset - their home. Note the word - home, not house. |
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Bubble virgins
by matt d
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#1000306
of 3278
22 Oct 2002
02:45 AM |
There are some obviously fallacious arguments being made here:
"Valuations are way too high and set for a fall": tech stocks were clearly overvalued in 1998 and speculation was rampant, with many clueless amateurs involved in the market - they then rose massively in the next 2 years.
"The supply & demand is favourable and will lead to rising prices": demand for dot coms overwhelmed supply in late 99, with record volumes and bullish comments from the press and experts - 3 years later and they have all collapsed.
"Government/central banks will come to the rescue and prevent a crash": the Fed cut rates with record speed from 2000-2002, yet the stockmarket still collapsed.
Fundamentals and valuation do not determine short-run prices - overvalued assets can clearly become even more overvalued. And the periods before market tops are ALWAYS accompanied by lots of good news, high volume, very strong price appreciation over the past few years, and an excess of demand over supply - the notion that past price rises will ensure their perpetuation is clearly moronic. Governments cannot repeal the laws of supply & demand, unless they literally compel people to buy and sell assets.
Stop making arguments that have already been disproved many times by economic history. It is boring and simply makes you look stupid. |
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HOUSING
by Mr LP - Berks
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#1000305
of 3278
21 Oct 2002
09:01 PM |
I refer to the various postings as of late in particular Martini Guest and Miss Masters. Too much appears to have been made of "corrections" and "deflation" etc and the rising prices of properties today. I do not believe that a credit crunch will arrive - economic policy today is far too sophisticated for that to happen. The fact still remains that if people had bought properties even 5 years ago, then their worth today is substantially more than if their money had been kept elsewhere. The fundamentals talked about seem to be based on mass hysteria that prices are bound to drop to the point where the vast majority will suffer. Not true - many people own outright and substantially more have a hugh equity percentage. If prices drop as these postings seem to suggest - they simply do not sell !! After all, what better way is there to keep a roof over your head than not having to pay mortgages [especially when its paid]- remember, those in rented accomodation still have to pay rent and I am sure they are not exempt from job losses, income downsizings etc.
To date no one has yet explained how owning outright is a disadvantage. Remember, buying and selling is a phased approach over many years. Not everyone buys and sells at the same time, same year and same decade. The disadvantages for todays youngsters, first time buyers etc is all too apparent as it seems like a hurdle too great to overcome. They are at most risk. Personal example. I came to London 23 years ago, and effectively "squatted" in a friends flat for the first 2 / 3 years. With dedication and the sacrifices previously talked about, was able to subsequently buy and then own outright. Had I not, then from the same income I now have, rent would have had to be found somewhere. Present situation no mortgage and more disposable income.
The are the real fundamentals that should be considered and not those just talked about which just focus on prices at one point in time but spread over the years.
Not everyone will be forced to sell and hence reduce house prices - its invariably better to hang onto an owned place than go out, sell and rent !?!
Please ... |
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Fundamentals
by sho_ryuken
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#1000304
of 3278
21 Oct 2002
08:25 PM |
To Miss Masters, here's a fundamental for you:
"Buy when everyone else is selling and hold until everyone else is buying." (JP Getty)
Extradry Martini is absolutely right. I think anyone who enters the market now is asking for some serious trouble. When everyone else is buying it is not time to buy, but to get out !! We have seen this before with the dotcom bubble, the same is happening to the stock market generally, and the same thing is very likely to happen to the housing market exactly as it happened before. People have very short memories and are too easily taken in by mass hysteria and the belief that somewhere there is free money to be made.
The problem with the housing market is that there is far too much emotion attached to it and people will do their utmost to cling onto whichever view is in their favour rather than taking a rational view of the market.
Miss Masters is obviously a home owner and has obviously taken in a lot of the "fundamentals" from the mortgage lenders and estate agents about affordability, supply and demand, etc, etc. All well and good, but that is like believing the patter of the used car salesman !! People hear what they *want* to hear.
Here's a few more "fundamentals" for you
- Houses have risen by 91% in real terms since 1973 (a little overvalued, wouldn't you say ?)
- In the past year there has been a net OUTflow of people from London, not the mass influx we are led to believe by the "used car salesmen", so any increased demand (if there really is any) comes from speculators who will get out of the market quick sharp when they think we have reached the top.
- Gordon Brown is probably set to raise taxes in the near future, which means less income and less to spend on the mortgage
- All our main trading partners are in recession and the only reason we have kept out of recession is by consumers blithely spending paper profits. The banks will not be able to lend like this forever, and the threat of deflation may make repayment a lot more painful than anticipated, if those people manage to keep their jobs.
When the used car salesman are giving you bad news then there really must be something wrong. The National Association of Estate Agents has already warned first time buyers not to buy, and to quote the new chief exec of the Abbey National, "We look set for a correction".
If he is telling us that then things have got to be bad !!! |
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Fundamentals
by Extradry Martini
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#1000303
of 3278
21 Oct 2002
05:33 PM |
Miss Masters,
When I said “get out now while you can”, I was, of course referring to property held for speculation, or loans taken out against a rise in the value of someone’s real estate. I apologise if this was not clear enough for you. Of course, you are right when you say that people have to live somewhere. Selling a property whose mortgage (and any other debt secured against it) you can easily afford for the foreseeable future in order to rent (and thereby try to pick a top in the market) is just as speculative as buying to let right now. However, if a small downturn in your fortunes is possible, I would advocate reducing debt any way you can – your collateral is just about to worth a whole lot less.
On to “fundamentals”. I think you have missed the point. You mentioned your parents house, bought for £7,000 in the late '60s and now worth £300,000. I think you would agree with me if I said that since 1994 (i.e. during this current bull market), the value of their property has more than doubled. In order to compare £7,000 in 1969 with £300,000 now, I have looked at the official change in RPI over the period – a total 1,057%. In other words, in today’s money, that 1969 price was £74,000 – about 25% of it’s current value and more than 50% of its 1994 value. In other words, the value has gone up 4 times, not 40 or even the 16 times assumed by those that say that prices double every 10 years. Taking out the recent bull market, however, it did not even double in value in the 25 years to 1994 - a piddling de-compounded rise of 2.8% p.a. in real terms. But a rise is a rise:
Assuming your parents took out a mortgage, they were still only repaying on £7,000 – that is what has been so good about inflation in the UK – it has reduced dramatically people’s debt. Now, look at it the other way round – in periods of deflation (there hasn’t been one in the West since the 30s), the real value of debt increases, not decreases. But interest rates cannot be negative, so anyone with a loan is paying interest on an ever-increasing amount. In fact, although official central bank (Bank of England) rates go down to close to zero, consumer interest rates go up as banks are increasingly unwilling to lend. This has already happened in the wholesale banking markets – corporations and banks are finding it much, much more expensive and difficult to borrow money in long term loans. As a result, a credit crunch is emerging, hitting corporations and banks – it is foolish and naive to assume that the mortgage borrower will escape. To spell it out, banks are in trouble and need to dramatically reduce the money they are lending in all areas – this will ultimately come via restricting mortgages (and therefore real estate demand) and higher consumer interest rates – it is only natural.
Ok, now look at a few other factors. Firstly, mortgage repayments (irrespective of interest rate levels) are at all time highs relative to income – there has to be a limit that comes from “affordability”, yet you insist that prices will keep on rising – why? Average incomes are set to go lower, and the high/ish end of the London property market will suffer when City redundancies make their mark – so how far do you think it can go? Another way of measuring fair value (actually, even “reasonable value”) is by looking at the rental/mortgage cost ratio currently at around 0.70 – in other words, it costs you nearly 50% more per month to service a mortgage than rent the same property. It is unsurprising that this is the case (owing to buy to let activity – which pushes purchase prices up and rents down), but it is unsustainable in the long term, especially given the economic outlook. It is always the speculators that get out of a market first, and there is more speculation now than there has ever been.
Inflation has masked a mediocre real rise in property prices since the war, and has helped a lot of people overcome their debts easily. Inflation is, for the time being, dead. It is no accident that deflationary periods have followed the bursting of asset (eg stock market) bubbles (US in the 30’s, Japan in the 90’s). Capital is collateral and the more of it there is, the more available and cheaper debt becomes. When capital is destroyed in a bubble bursting then so is collateral - and lenders have a problem. When lenders have a problem they stop lending.
There are your “fundamentals” - it’s not called capitalism for nothing….. |
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demand/interest rate mean increases
by Mike T
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#1000302
of 3278
21 Oct 2002
04:08 PM |
I think property prices will continue to rise, particularly in East London (where I live) though not possibly at the rates we have experienced in the last 12 months. There is room for growth in the east end and many young professionals are moving here to get on the ladder.
The area is also on the up (many developers in the area and estate agencies). I cannot believe the demand in the area. Talking to a friend who is an estate agent (admittable people who will always "big-up" price hikes!) has told me that a 3 bed house that goes on the market at 10am Monday will be sold by 5pm friday. At this rate prices will not go down.
let me know your comments please. |
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Housing
by Miss Masters
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#1000301
of 3278
21 Oct 2002
03:00 PM |
To Extra Dry Martini guest.
Absolute nonsense !! Perhaps he / she does not own a property. Interest rates if maintained at current low levels [a very real probability]will ensure cheap money to buy large capital assets. Add that to relatively cheap mortgage protection schemes [not something widespread a decade ago] AND, yes, supply and demand, will continue to ensure that in the medium to long term prices will rise. Sure, as history has shown us, there will be ups and some downs along the way. Note another posting and many peoples examples eg. my parents a house purchased in the late 1960's for £7,000 now worth well over £300,000. I can bet my life that this same property will never return down to that figure !!
People getting out while they can ? Where for God's sake ? Onto the benches of parks up and down the uk perhaps ? Get real - people need to live somewhere, whether via a mortgage or via renting. Just ask anybody looking for renting whether privately ["my god the cost and the quality and the asking amount...] and those hanging down the council for [often run down and semi-dilapidated] housing etc. Demand and Supply are finite quantities, and with ever growing divorces, old people having better [and often private health care] living longer, and the building being the lowest level of housing for decades. Then the influx of immigrants etc !! Furthermore, can you see large upheavals of peoples gathering to migrate onto wastelands and camping out ?
I am afraid your fundamentals are wrong !! |
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Think!
by Extradry Martini
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#1000300
of 3278
21 Oct 2002
01:29 PM |
I can’t believe some of the arguments people are using here to support their view that the UK property market will keep rising. Let’s take a look:
1. Interest rates are low and set to go lower.
This is true when talking of Bank of England rates. But look at why they are set to go lower: Global deflationary recession, the effects of which are far, far worse on real estate than any hiking of rates to combat inflation. What deflation does is increase the real value of debt (not reduce it, as inflation has always done since the war). At the same time, the credit crunch (which on a corporate banking level has already begun) means that banks are less willing to lend – that means lower access to debt (i.e. much fewer buyers), and those that can get a mortgage find that their APR is HIGHER despite lower BoE rates. Add to this the fact that incomes are lower, stock market investments are worth less and personal debt levels are at record highs and you can see how messy this could get.
2. Lack of supply in the market.
This is by far the most asinine argument I have heard yet. What it is saying is that current levels of demand outstrip current levels of supply, therefore the situation will continue (by extension this must mean forever). Like any market, the supply-demand equation can change in an instant. There is more speculation currently in the global property markets than ever before. Buy-to-Let is currently a mantra in the UK, and buying any house you don’t live in is speculation. So, what happens when the Buy-to-Let people start selling? Collapse, of course. From what I can tell, the rental market in the UK is already flooded and there is no margin over the mortgage from letting out a property. Therefore, it is only a matter of time. There is a much broader, more insidious, form of speculation out there: “equity release”. Borrowing money against the rise in value of an asset is fine as long as you know that when you pay back the money you can either do it through income or through the sale of the asset itself. Otherwise it’s suicide. Or, looking at it another way, there will be many forced sales of property by banks once the value of their collateral (your house) declines to below an acceptable percentage of the debt, thereby forcing the market down still further. Borrowing money against the value of an asset is called leverage and it works both ways. The other implication of the “lack of supply” argument is that people will continue buying even if they cannot afford it on current income. This is just absurd, especially in the context of falling income.
3. Property prices double every 10 years.
They have done, but not in real terms – most of the time they have stayed constant. Inflation is now out of the question, so this will be impossible.
It’s all classic bubble talk, using increasingly far-fetched arguments in order to support a theory to which one is emotionally attached, while in the back of ones mind, one knows that one is wrong, but desperately hopes that one is right. The collapse in property prices in the UK is going to be much, much worse than anything ever seen before – I can even see them below the 1994 low level. Get out now while you can – you’re an idiot if you don’t. |
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S Higino Rent v Buy.......
by Shareholder
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#1000299
of 3278
21 Oct 2002
11:50 AM |
Rent v Buy........
Well it depends on individual circumstances.....
We have to differentiate between buying property to live in and buying as an investment.
It is ,however, very interesting to analyse the circumstances when it is better to rent than to buy and visa versa.
Another factor is the state of mind that arises from being dependant or being independant.
It is also the ability of the individual that is important, many home owners not having the skills to do their own repairs etc. or the necessary funds! |
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Everything has a price.....
by Shareholder
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#1000298
of 3278
21 Oct 2002
11:30 AM |
No regrets shareholder you wrote about trusts.....
Tell me more! i have also been involved with trusts and have come to the conclusion that a price has to be paid for everything. Trusts can pay higher tax, have reduced capital gains allowances and other restrictions. They do carry a price!
When i take advice , those giving it give the advice that nets them the highest fee , if not now at some stage in the future!!
Have you had problem tennents??
Do you realise that many business interests are free from IHT but not business making or holding investments. That includes rental property!!
I would be interested in your comments or anything you can teach me, please! |
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Housing
by S Higino
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#1000297
of 3278
21 Oct 2002
11:21 AM |
| Why we a not start new topic on RENT Vs BUY ? |
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Housing
by No regrets shareholder
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#1000296
of 3278
21 Oct 2002
11:12 AM |
Re : Shareholder Guest. I understand what you are saying, but try to get a landlord to paint, decorate, and do all the necessary maintenence for you. Most have a landlord responsibility for the basics but not the luxuries !! I know, I both own {outright]and rent a second property. I now enjoy the money others would otherwise would heve to spend on rent on 3 / 4 holidays per year etc. The rent I receive on house 2 more than covers the mortgage still remaining on that property - although I have taken the decision to pay approx the same as the mortgage outgoings [nearly 50 % more]as I have bought that property a decade ago. Again, that way I protect againgst interest [if any] rises as I am substantially in credit. Yet I only have 3 years to go.
Also, I have arranged various trust arrangements to protect these properties from falling into the wrong hands[the grabbing labour govt, social security etc for old care and so on].
I am still in my mid forties.
There are several in my position - a lot depends on how you arrange your affairs - it does'nt take much and remember, until the govt changes all these arrangements[I doubt they can change arrangements already existing in place] I have the best of all worlds. Yes it can be done - and with the right advice, etc people can still see the value of their lives increase substantially and maintain the value of house prices.
One final point, many who earn as I do did not take this route [they took the "smart" route - rented for fear of the "mortgage" and now regret to live it] Also, with care, you can from Insurance Companies buy a policy to cater for this eventuality - so no mortghage and one of these premiums still means you overall pay less then then the rental option and protect your assets further.
The rich have been doing it for years so get good advice !! |
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