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| The UK housing market: a bubble about to burst? |
From the Horses / Lenders Mouth
by DJW
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#1000325
of 3278
 23 Oct 2002
05:40 PM |
Good posts from Extra Dry Martini and the Rev HK. Fact not emotion. I would like to back up this argument with data straight from the Nationwide Building Society. Look at page http://www.nationwide.co.uk/Hpi/historical/PDF/CMQPRQ302.pdf
This is the quarterly review for Q3 September 2002. Now look at the graph in the top right hand corner of Page 10 - "Long Term Real house Price Trend". This graph shows the real value of house prices (Adjusted for Inflation since Q1 1970 and Q3 2002). Note from this graph:
- The REAL Price of Houses (After taking inflation into account) booms and busts eg it goes up and down - it has never in the past 30 years leveled off to a steady plateau
-We are currently at the boom stage of the cycle
-That Nationwide tries to draw a long term trend line through this graph - which makes no sense ( A straight line does not fit the data in anyway)
-That the size of the bust is of similar size to the boom that preceeded it. From the graph this suggests a drop of at least (110000 -65000)/110000 = 45/110 = 40% is likely.
Remember this is the data coming from the Nationwide Building Society. One of the UK's biggest Mortgage Lenders.
Buying a house is no guarantee that you will make money after inflation. It all depends when you buy the house and when you sell the house. I'm going to be waiting until prices drop by 40% until I buy.
In the meantime, I am happy to rent in the knowledge that I am not buying an overpriced asset, that is going to drop in value.
David |
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It's worse than I thought.....
by Extradry Martini
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#1000324
of 3278
23 Oct 2002
04:13 PM |
“Knowledge is Power” has made an important point regarding other risks in a bubble.
There are some big implications of what he says regarding the Council of Mortgage Lenders trying to get the Bank to raise rates.
The first, and most obvious, is that the CML recognises that mortgage lending is out of control. I mean “out of control” in its most literal sense – they cannot control it. The lenders know that current high values are only temporary and that people are carrying too much debt, so it wants the bubble to be pricked now before it goes any further. So, why do they not do it themselves by restricting mortgages or raising mortgage rates? - Competition. Comparing mortgage prices and conditions has never been easier, and the ability to transfer a mortgage from one lender to another has never has never been stronger, so competition is ferocious in the mortgage market. If any one lender makes his mortgage rates more expensive, his whole portfolio goes somewhere else. If more than one lender tried to do it at the same time it would constitute illegal price fixing. So, lenders are in a bind – they have to maintain their lending conditions in order to stay in business, but know that a huge chunk of the collateral against which they have lent (and are continuing to lend) will cease to exist soon. Very, very nasty! In fact, it’s the stuff of bank failures.
At the same time, the Bank of England has to continue cutting rates, not raising them. The Bank needs to keep money as cheap as possible in the face of deflation and possible bank failures (see above), as it has the whole of the economy to worry about. Besides, it is not the place of central banks to monitor or burst bubbles. Alan Greenspan was absolutely right in what he said in the summer – in a free market economy it is not up to the central bank to decide at what level of price an asset class should be. This is because the extent of a bubble can only determined after it has burst - even if its existence can be recognised at the time.
Rev HK has blown the absurd “supply and demand” argument out of the window with his example: Hong Kong has probably less space than anywhere else on the planet, yet prices have fallen so much. It just goes to show how quickly supply and demand imbalances (or, more precisely, perceived supply and demand imbalances) can reverse themselves.
Reading some of the posts in this forum, there seems to be an underlying belief that citizens of the UK have a right to see the value of their real estate rise. They are blind to the reasons behind past rises in the market (a lot more to do with inflation than the “supply and demand” argument they keep trotting out), and they believe that anyone pointing out that the market is overvalued is trying to take away this right from them. Of course, when the bust comes and they are turfed out of their homes with a debt to pay back for the rest of their lives, they’ll be blaming someone else. The fact is that the average consumer, not only in the UK, but also in the US and most of Europe has borrowed far too much money and is going to have a real problem paying it back. Quite simply, he’s taken too much risk and only has himself to blame.
The emperor has no clothes, yet so many people are admiring the stitching… |
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bet your more scared than you let on
by rev.hk
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#1000323
of 3278
23 Oct 2002
02:43 PM |
My my. Steve seems to be very pissed off at Extradry. I wonder why that is? I last contributed to this forum in August when interest was little and ranters were nil. Now, with things looking ever more dicey on the global front, there seem to be ever more ranters prepared to suspend reality. A coincidence? Hmmmmm….
Anyway, dear Steve, Miss Masters and all the other self-delusionists, house prices can collapse and they regularly do around the world….if you care to do your homework on manias.
Since 1997, property prices in my home town (Hong Kong) have fallen by nearly 70% - even with tightly restricted supply. Like the UK, they touched the wild blue yonder in the final months of the bubble in 1996/97. Now, Singapore, Japan and many other places around the globe are full of sorry punters who denied reality and bought into madly-valued rubbish.
Ever heard of negative equity? It's something that renters don't have. Mortgage owners do. Ever heard of relative value? It's all about buying low and selling high. Not the other way around.
In the UK, you now have the highest household debt in your statistical history. Yes, interest rates are at a generational low and servicing that debt is easy at the moment. But low interest rates aren't available because you’ve never had it so good. It's because pricing power in the world economy is collapsing. And property is always the last price to collapse after a bubble. It will happen. It's just a matter of time.
You might also consider this little story next time you give your linear forecasting lecture on house price inflation. It goes like this…..
Everyone has a balance sheet and it has assets (A) and liabilities (L). The objective is to keep L growing more slowly than A. On the L side, let’s assume funding is cheap. Interest rates are low. On the A side prices are going up with gay abandon. Everyone thinks, “I'm rich! Let’s take out more loans. We won't have to pay that much a month. We can re-mortgage the house. Prices must surely rise since supply is at its lowest since the 1920s.”
At this point, let’s assume we start out with A split into 60% property, 25% equity and 15% cash.
Then things change a bit. The FTSE crashes again when everyone finally realises the US recovery is a mirage and global deflation is upon us. The percentage of everyones’ portfolio that is in equities now falls further. (Since small time punters don’t hold bonds we’ll assume they’re all in property, equity and cash). Then, because life insurance companies – who hold a huge portion of the equity market - have to keep to strict solvency requirements, they sell ever more equities. Stocks plunge further and household debt-servicing becomes ever more dependent on the value of property. (A now equals 70% Property, 10% Equity and 20% Cash).
Meanwhile, long-term liabilities are building because interest rates, in real terms, are rising with the fall in global pricing power. If property prices were to drop, then households would have very few liquid assets with which to meet their obligations and balance their accounts over the next 1 – 5 years. Anyone who thinks that banks will now allow you to re-mortgage our house has lost track of reality.
Then, because the stock market has crashed and corporate bond spreads are widening, companies (employers) have no money to expand and unemployment starts to rise as bosses focus on cost cutting, either through lay-offs or property sales.
Punters who now face the sack and mounting liabilities have a balance sheet that is 70% illiquid property, 10% free-falling equities & 20% in cash or savings. What do they do? - even before they realise their retirement pension is linked to the collapsing stockmarket and they now need to save even harder from their threatened monthly salary.
Do they hold on to their houses forever and pour scorn on those poor renters who have forgone buying wildly over-valued properties and used their money to buy cheap under-valued assets?
Nope, they wet their pants when they realise they’ve made the biggest financial mistake of their lives.
But it is now too late to sell the only asset of substance they have left. Manias are just as vicious on the downside as the up. With thousands of buy-to-letters trying to sell (including companies off-loading office space) the property market collapses and the banks repossess in droves……long before the home owners get within reach of mortgage relief…or the local priest.
This is what happens in bubbles folks, whether you like it or not. Household debt at record levels and a worsening debt-led global recession are not things to ignore. They are things to be absolutely terrified of. Only fools try to deny reality. Pain and suffering is coming your way. |
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The problem UK property market
by JJ
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#1000322
of 3278
23 Oct 2002
02:41 PM |
The UK housing market is a perpetual problem with its distorting impact on rest of the economy, accentuating economic booms and downturns and distorting interest rates in the process.
The worst offender is the South East of England. What we have today is interest at 4%, thanks largely to the white hot property market boom, for which they're too low, but too high for businesses struggling with a slowing world economy.
What London needs is lots and lots of sky scrapers like Hong Kong or Singapore, given the confines on space and the fact that no one wants to dig up the countryside.
A lot of economic activities should also be moved out of London to places that really need economic stimulus such as Liverpool, a kind of decentralisation.
Sure the current property boom, which probably still has some upside to it, will eventually crash as the economy heads for recession and deflation and joblessness increases.
But then the economic cycle will eventually turn and we'll have another property boom and be back to the same old problem, which is supply and demand.
The South East and especially London needs vast amounts of new accomodation and most of it at the cheaper end. There are lots of old third rate office blocks and old warehouses, which can be torn down and built on. |
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Madness
by Knowledge is Power
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#1000321
of 3278
23 Oct 2002
01:50 PM |
Couldn't agree with you more Mr Extra Dry.
There are very few in the public limelight willing to contradict the implausible notion of a house price plateau. Perhaps the effect of a self fulfilling prophecy underlines this argument greater than anyone can ever know?
I think for me, the most ludicrous notion that has surfaced in recent weeks has been from the Council of Mortgage Lenders, and their request of the Bank of England to raise interest rates. Passing the buck would seem a fair choice of words in this instance. If the CML are unhappy with house price growth, then they should take it upon themselves to limit the banks and building societies ability to offer new mortgages and facilitate mortgage equity withdrawals. This quick set solution would cool things a treat. But hey, it’s about making money so they wouldn’t do that would they?
In previous posts there is a continued mention of “simple economics” like; supply, demand, etc. But I think this oversimplifies the situation. I would argue that it is friends and parents suggesting and recommending that is fuelling the flames. The “if you don’t get in now, you never will argument”. Well I think that is rash, foolish, and very unrealistic.
Longstanding advice has always been to save 20% of the cost of the property as a deposit. This gives you both a decent cushion against a fall in prices, together with providing a high degree of freedom when choosing a mortgage. This seems to have gone out of the window, with 100%, 110%, 120% mortgages both readily available, and popular to obtain. Not I’d say so much to assist people in renovating a neglected property, but more to help meet the escalating cost of spiralling prices. I wouldn’t touch one with a barge pole, or buy now – no thanks not for me. I’ll take the safe and assured option!
Oh, that sounds like a self fulfilling prophecy… and it is. That’s what’s causing demand and raising prices.
On a final note to respond to the “mortgages are more affordable now” argument. Yep interest rates are low, very low, the lowest they have been for 38 years. Does that mean everything is rosy and good – no. The reason why they are so low, continue to remain so low, and will for the foreseeable future remain so low is that the BoE is trying to stop the UK from going into recession. And we all know what happens in a recession…?
The British have an obsession with owning your own home, and as a result more people per capita own a home in the UK than any other country. I just hope it doesn’t get to the point where this obsession actually hurts the UK (and so does the BoE). |
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Another popular fallacy...
by Extradry Martini
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#1000320
of 3278
23 Oct 2002
12:38 PM |
There also seems to be a view out there that somehow property prices will not fall, but will level off and stay static for some time. This has come about because estate agents don't want to put off potential customers by telling them that the market may well fall by a lot. At the same time, they know that saying that prices will continue going up forever is plainly ridiculous.
So, they have to tell people that they think the market will do what no other market has ever done in the history of mankind and rise to a plateau where it will remain.
The more speculation there is in a market the stronger the boom and the stronger the bust. UK real estate is under more speculative activity than it has ever been - so, no, there is no chance whatsoever of a "levelling out of prices". In fact it is far more likely that prices go on rising 20-25% (*) a year for a few more years than they just remain static.
* We are way above fair value now, so any further rises will just be further losses in the crash... (see my Nasdaq example in previous posts) |
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Oh dear!
by Extradry Martini
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#1000319
of 3278
23 Oct 2002
10:29 AM |
Steve,
Please take a deep breath, calm down, and read my post again. I wasn't disputing your analysis of Ga's equity.
I was making a point about how you are so wrong to believe that the property market will go up forever.
The numbers I used did not form an example but are FACT. If you look at average house price data and inflation over the 1989-1994 period, you'll see that I am right.
Ok? |
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Housing
by Steve
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#1000318
of 3278
23 Oct 2002
09:41 AM |
To Martini - please, YOU WAKE UP !! My example clearly shows that to maintain a roof over your head to rent is dead money. Therefore, whilst you waste the exact amount in rent [which goes nowhere - even you must see that] GA will after he has finished paying for his house, have NO "basic housing cost" outgoings as he has no mortgage [the poor suckers not choosing that path will still be renting AND paying] As an example to take Martini's extreme example,if the value of his house [never to happen of course] was to down to even £20,000 an 80 % drop - as an example - he will still be better off. THINK?? - £385 pm rent for say 25 years is £115,000 over his life that owning outright will not cost him.
As aresult, people like Martini will then start to see sense as it will effect their pockets.
These basic economics will of course maintain a value for houses.
Other points of worthiness -those who rent and have money will of course not get benefit assistance for rent until their bank balances etc drop below a certain threhold [not much I believe]AND please show me anyone who is worse off owning rather than renting their own home.
Martini, please get real!! |
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WAKE UP!
by Extradry Martini
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#1000317
of 3278
23 Oct 2002
09:20 AM |
Steve said:
"...because as we all know, prices will increase again,as what goes down will bounce back up..."
You guys just don't get it do you? You haven't even made the slightest effort to ask why house prices have gone up so much since the war:
INFLATION!!
The notion that something has to keep going up in the long term because that is what it has done in the past is what bubbles are made of, and is the principle reason why people go bankrupt after they burst. Look at gold - everyone thought that gold would go up forever - it is still worth less than 1/3 of its 1979 high.
Read my previous posts below and you'll see that inflation has been the principal factor to give you and everyone else the idea that real estate is somehow this magical asset class that will always go up and doubles every 10 years. You're in dreamland!
The UK mortgagee has been relieved of much of his loan by inflation - while average salaries have more or less kept up with inflation, mortgage amounts do not change with it, therefore inflation has been massively helping the housebuyer pay off his loan. However,
inflation is now dead, so this is not going to work any more.
As an example, most people think that house prices fell on average 14.5% between the 1989 high and the 1995 low. They did - in nominal terms. In real terms, i.e. taking out the effect of inflation, they fell 39.6%. So, if there is a house price fall comparable to the 1989-95 period without inflation, then UK real estate is going to lose 40% of its value. If this bear phase lasts a similar amount of time, say 5 years, and the market is going to double in 10 years time, then it has to more than triple in the remaining 5 years.
Now, remembering that inflation is going to zero (and probably negative) and that a recession is on the way, and the fact that there is exponentially more speculative activity (i.e. "long positions" from buy-to-let and "equity-release" loans) in the UK property market now than there were 10 years ago, and you might begin to see how bad it all looks.
A mortgage is the largest debt you are likely to have in your lives - yet so few of you are doing your homework - you're just repeating this tired old mantra!
I think a lot of the problem is that people tend to believe something just because so many others do - if you knew anything about bubbles and manias you'd know that most people get it wrong most of the time... |
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ga - is a crash inevitable?
by Martin H
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#1000316
of 3278
22 Oct 2002
11:34 PM |
Answer - no.
There are two factors involved - demand and supply. If we continue to build the lowest number of houses since the 1920s, then there is a support for the prices you see now.
Availability is the important criterion as to whether property is either expensive or cheap. |
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HOUSES
by Steve - the sensible way
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#1000315
of 3278
22 Oct 2002
05:43 PM |
To GA - I take it that the inheritance you have received is fairly substantial and that currently you rent. Unless I know the full facts then its difficult to evaluate.
However - an example will suffice. Assume your house is £100K and you place down £80K and take a £20K mortgage. Your approx mortgage per month will be about £385 per month - if compared to renting at that figure, then its worth doing as in 5 years time you have no mortgage outlay for the rest of your life [assuming you wish to stay settled] Rent is dead as it serves no purpose whatsoever except as a drop to your disposable income - for life !!
Even if the prices do drop (say 20%)so your property for a while drops to £80K initially, then the £20K mortgage you have paid for [and initially and only "apparently"] equates with the rental wastage. Remember, a loss is only realised when the decision to sell is made for it is at that time that you "cash out". You can well afford to hang out if the worst were to happen. If you look at it that way, then it is a very sensible thing to do, because as we all know, prices will increase again,as what goes down will bounce back up so with such a large equity in the house - you have all the elements in your favour.
Believe me, a decade down the road you will be laughing whilst our rental brothers are still wacking away throwing money down the drain.
Believe me, from where I live £385 per month rental would get you the "dilapidated" style properties if you were to rent so do not believe the story about those who claim its all maintenance free, blah blah blah, etc as everything has a price and no landlord would consider ploughing good money from such a low rental into maintaining it adequately for you.
Good luck, I hope you take the sensible route [even if prices were to dip, temporarily] as you will far reep the benefits by buying rather than renting - look at your own example - an inheritance to be able to pass down !!! |
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please elaborate
by ga
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#1000314
of 3278
22 Oct 2002
04:58 PM |
| my situation is i have recieved an inheritance and can put a deposit on a 2 bed home in my desired area and take out a mortgage of approx 20k over 5 years. is this worth doing? |
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Shortest post ever for ...."ga"
by Shareholder
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#1000313
of 3278
22 Oct 2002
04:54 PM |
| NO! |
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crash by how much?
by ga
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#1000312
of 3278
22 Oct 2002
03:46 PM |
If prices did crash in London and the South East how much do you think they will drop by?
Is it worth waiting for a crash to happen if you can afford to enter the market now? |
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Where is the money coming from?
by SL
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#1000311
of 3278
22 Oct 2002
01:17 PM |
Not only are individuals highly leveraged - Radio 4 this morning, subject: Financing the government's expenditure plans, given economic slowdown and bleak outlook - government solution: Increased borrowing, not taxation.
So now the government is increasing debt levels, too.
Despite this, home owners are "earning" more from their property value increases than their salaries. And they're spending some or all of their increased wealth by remortgaging.
Lots of expenditure through borrowing, but where is the money coming from? |
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