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| The UK housing market: a bubble about to burst? |
Clare - I am in same boat
by rick
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#1000340
of 3278
 25 Oct 2002
10:14 AM |
I currently rent a 400k valued flat for 500pm and have done for 5 years - the result, nice standard of living but no savings. I would not buy it as the area is really nice and can only go downhill. I am looking at houses in the poorer areas of london in order to get on the property ladder.
i went to a talk in the city and a gentleman suggested that in london any sort of dip in prices was extremely unlikely as the london population is increasing as quickly as ever and not enough houses are being built. He said the population in 10 - 15 years could be split between renters for life and home owners (worrying to not have a valuable asset at retirement!). I am looking at the worse areas of london and may even consider the home counties because I just cant see the market dipping with so many people looking for properties out there. |
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Housing
by Reality
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#1000339
of 3278
25 Oct 2002
09:49 AM |
To rev - really, I am not here to banter either, or have my featers reuffled. To conclude, my point is simple. In 3 years no debt plus an asset. Should I then have no further work, or very little I will not have to pay for housing. A man in a rental situatuion with the same set of circumstaneces will invariably have to find his rent - or he faces the streets. Clearly the people of today going into the first time buyers market face a higher risk than I now face [for sure]as they starting off - but a lot of people have been there.
Goodbye |
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Into the deflationary vortex...
by rev.hk
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#1000338
of 3278
25 Oct 2002
01:29 AM |
Reality, you seem to be irked by my comments and have resorted to insults. Apologies for ruffling your feathers, but please let’s ditch the black banter. None of us need to be here.
Your logic regarding savings is quite correct in an inflationary world. Yes, in normal post-WWII circumstances, someone with 3 years to go on their mortgage and 22 years of working life left, will have more money that someone who rents. Many people, I'm sure, wish that they were in your position - even those making up the record level of household debt.
But the central point of my posting will not go away. Every market in the economy is linked and most people do not understand this. If they did, they wouldn’t be getting madly into debt right now since they would realise their ability to fund their long-term liabilities and their retirement is diminishing very quickly.
Returns on life insurance, pension funds, equity holdings and property are all driven by price inflation. After thirty years of inflation, we are now heading into a period of debt-deflation which will put a severe cap on ability of anyone with debt to save.
If you look at the history of debt-deflations, it takes years before asset prices begin to rise from their fall and many, many more before they ever get back to the levels enjoyed before the crash. It took the Dow almost 30 years to return to 1929 levels.
This has enormous implications for job security, debt-servicing and (ultimately) the value of property in the UK economy. If you have to save more for the future, you generally put a cap on your spending with the obvious and immediate implications for the retail and property sectors.
The retort from you suggests that you have a lifetime of work left in you and there will be no interruption to your income. This is naive. If your career is in mid-stream, where are you going to get the money from to retire on and maintain our lifestyle if you lose your job, suffer realised losses on all your investment and savings funds and then can’t find work for five years? Very few seem to have thought about the long term UK implications of deflation and the on-going decline in world equity markets.
Extradry mentioned Japan as an example of how a modern, sophisticated economy can hit the wall when riddled with debt and pyramid property schemes. Yet the Japanese people (who are also a nation of homeowners) have huge personal savings worth almost 50% of GDP that they can fall back on in times of hardship. Even so, property prices in the six main cites are down nearly by 85% since the peak in 1989 and Japan has been in recession for most of the last decade. Unemployment is at record levels and mounting bankruptcies are being hidden by a government desperate to keep the lid on things.
By contrast, personal savings in the UK are almost non-existent. Where does that leave you and the UK property market?
I'm not here to antagonise. I've just seen and heard it all before. |
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hOUSING
by lORRAINE
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#1000337
of 3278
24 Oct 2002
11:19 PM |
To Clare - why not try to move to another part of London where for the same rental outgoings you get a far better house AND for the same money get a repayment mortgage ? I think its down to choice and how you view what you expect to get out of your life in the long run. I did exactly that many years ago, subsequently sold up and moved to the country where I now own ouright. I have the equivalet of your money rental now to enjoy good holidays, etc
Its the best thing I did, although in your case by having a repayment mortgage as your figures states, the interest bearing element will go down through the years. The first few years you may suffer, but that is the unfortunate consequence of prices which apparently are beyond your reach.
I [and countless others] were faced with a similar scenario many years ago, but the passage of time will ease the long term buyers debt [as previous postings have quite specifically made it clear]after several years.
I also believe that your example of a 2 bedroom flat with the type of rent you have to pay also shows that renting too in the long term is simply not a very sensible option, as you are subjected to the same market forces regarding jobs and so on, with the possible consequential loss of your home. |
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Buy v. Rent
by Clare
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#1000336
of 3278
24 Oct 2002
10:18 PM |
| Whilst in the long-run it definitely is better to own outright rather than to buy, it does not make sense to buy in London now. I rent a lovely 2-bed flat in a nice are for £1600 per month. Similar flats to buy are priced at £500k. Even if I were to put down a 20% deposit at 5% interest I would pay £1683 in interest and over £2100 in a repayment mortgage. Will someone tell me why I should pay more in interest than in rent? Or why I should instead choose to live in a less nice area and reduce my quality of life just for the privilege of a mortgage? If the cost of interest is more than rent (even at low interest rates) than current prices clearly are unsustainable. |
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Housing
by Reality
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#1000335
of 3278
24 Oct 2002
09:08 PM |
To rev from Reality - Your comment what is the point of a 92 % equity when you have no money to retire on ? THINK - 3 years to go and a further 22 years to retirement assuming aged 65. Two things - first, no mortgage payment equals money to be put away for retirement. Second, if need be sell at retirement. Practicalities ? Compare A {this example] and B [man no mortgage] both same age 40 and both take home pay £2,000. Mortgage AND rent is £650 per month.
Thus,A, man with mortgage for 22 years after he finishes paying mortgage will have £650 per month = £171,600 to put away extra. Thus, B ,with rent after man A finishes mortgage will NOT have £650 per month for 22 years = !171,600 for retirement [unless he chooses to kip out on the local park bench !!]. Conclusion - Man A will have $171,600 more than man B PLUS the value of the house. Even if that house were value £0 the economics speak for themselves.
Sorry to state the obvious but it is clear to me that the rev clearly cannot see logic - or is just on the page to antagonise !! |
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Bubble
by Pentecost
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#1000334
of 3278
24 Oct 2002
08:36 PM |
Investors are throwing money at houses because they will not throw it at the stock market. Markets in a period of money-throwing always inflate.
Intrinsic value has not changed, only market value.
Decide for yourselves if that market value is unsustainable, and if you think not, then follow me into selected sectors of the stock market in May 2003. |
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Hubble Bubble - The Fear Factor
by Rob G
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#1000333
of 3278
24 Oct 2002
04:42 PM |
I've been following this thread for some time now and for the most part found it very interesting (except from the usual few news group idiots who think that exclaimation marks and antagonising comments make their posting somehow more factually correct).
I have to first declare an interest: I am a mid-high earning, potential first-time buyer with cash in the bank who has seen his friends' properties soar in value over the past 5 years while I myself am still living in my parents large family home paying them a reasonable rental because I was not ready to buy at the time they all did.
Why have I not bought in the last 2 years? Because I am certain that we are in a period of unsupportable price growth in the housing market. As simple as that.
Extradry Martini (IMHO) has by far the most supportable argument that I have read in this discussion. I know I have a very vested interest in taking his position, but I am trying to take as balanced a view as I possibly can. Not to do so would be extremely foolish.
Remember these things:
There are a *LOT* of people in my position giving in to the almost irresistable urge to commit to the market now every month. People who are absolutely terrified that they will never be able to afford a property of their own. I assure you, even people who feel absolutely certain that it is madness are finding it next to impossible to sit out and wait.
The only thing nobody knows is *WHEN* the market will peak, but surely we must all agree that it will. Prices are just too crazy for it not to.
Once that happens, there will be no more pressure to buy and people like myself will wait out the market. Even those in the rental market. It is not certain that the market will fall, but I strongly believe that once the current hysteria has been removed, people will take a long, hard and realistic look at what they are willing to pay for a brick box with 4 walls and a roof.
Nobody who is not a potential first time buyer can appreciate this vital factor, so IMHO anyone who is currently a home owner is unlikely to be fully aware of the facts and so qualified to comment. |
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Chris wrote.....
by Judge Dredd
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#1000332
of 3278
24 Oct 2002
02:23 PM |
"Capital gains for all those buy-to-letters and the 'I like property so much I bought three houses' types would soon calm things down!"
Houses that are not your prime residence are already subject to CGT. |
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Yup...
by Extradry Martini
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#1000331
of 3278
24 Oct 2002
02:06 PM |
According to these people, it's only first time buyers that have a high mortgage burden, but it's also first time buyers that are supposed to provide all this pent-up demand and continue buying the market...(!)
Having just re-read, JK Galbraith's "The Great Crash 1929", one of the more obvious charcteristics of the mania was the absurd arguments people would come up with in order not to have to admit to themselves that they had made the biggest mistake of their lives..... |
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by chris
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#1000330
of 3278
24 Oct 2002
12:47 PM |
I love the guy who says 'don't worry it's only first time buyers who have high mortgage burdens'!
When the cost of getting on the ladder becomes prohibitive who's going to buy all the lovely houses owned by everyone else. This is a giant pyramid scheme where the only buyers will become those people already in possession of an over-priced asset. You can't work for very long on this 'greater fool' approach.
Just as an aside - one of the reasons we got here is property remains a highly-privileged low-taxed asset class. Capital gains for all those buy-to-letters and the 'I like property so much I bought three houses' types would soon calm things down! |
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The Great Misunderstanding....
by Extradry Martini
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#1000329
of 3278
24 Oct 2002
11:29 AM |
“Reality”, your numbers are wrong. The last bust in the property market did see a 40% drop, it’s just that inflation made it look like 14% (see my figures below. If you don’t believe them, see Nationwide’s own numbers via the link in DJW’s excellent post below). As DJW said, the bigger the boom, the bigger the bust, and this is supported by the variation from fair value that Nationwide’s chart suggests. As a result, it is my opinion that the market will fall much more than 40% from these levels, but 40% is a given.
Remember, inflation is dead (and probably going negative) so it won’t bail you out this time – any real falls in prices will also be nominal falls.
You say, rightly, that many will not sell – in fact, I agree with you and other posters on this – the vast majority will not sell. But that is not the point – there will be (as a result of speculation and forced selling) a far higher proportion of sellers than in pervious busts – and a resulting higher sense of desperation. A market does not need everyone to sell in order to go down. A good example can be derived by looking at telecom stocks: More than 85% of Vodafone stock ownership has not changed since its March 2000 high. Since then it has lost 75% of it’s value – i.e. with less than 15% of the company’s shares changing hands.
You are also right to say that the last crash was due to high interest rates as well as job losses. I think you have just identified the cause of so much complacency in the UK property market. Since the war (until now at least) the only types of recession there have been in the UK have resulted from the Bank of England (under orders from the Treasury) raising rates too high and too late to combat inflation. These were what are known as “demand-side” recessions – the cost of borrowing goes up thereby encouraging saving and diminishing purchasing power and the demand for a company’s products. As a result, there is almost no living memory of the type of recession common before the war – the “supply-side” recession (e.g. The Great Depression).
Supply-side recessions happen when companies suddenly find that they have expanded far too fast and that their capacity to produce in the future, and current inventory levels, are too high given likely sales. This over-capacity is caused by over-optimism and is often the result of inflated stock prices and the mirage of ever- higher sales. So, when the stock market bubble bursts, industry has to downsize its inventories by selling them cheaper (causing deflation), and has to reduce its capacity, by dismissing staff and selling business machinery (which also contributes to deflation) and commercial real estate. Naturally, all these people out of work means that demand diminishes as well, thereby forcing the companies to sell even cheaper etc. In the meantime, banks have lent to companies based on false future earnings expectations – suddenly they find that not only has the value of their collateral more than halved (i.e. the company itself via its share price), but that the company will not make enough money to pay back the loan. With so much bad and doubtful debt on the books, banks are forced to restrict lending by raising their lending rates relatively to central bank (BoE) rates, thereby diminishing demand further. The only thing a central bank can do is lower rates as sharply as possible to try to compensate. In the US, the Federal Reserve lowered rates from 6.50% to 1.75% in 2001 alone, and it looks like it has not been, and will not be, enough to prevent a deflationary supply-side recession. In the UK, the Bank of England, keen to prove its inflation-fighting skills having been made independent, has not cut rates enough.
So, what happens to a mortgage in this scenario? Well, the real size of the debt increases, and because the banks are restricting lending, mortgage rates (irrespective of BoE base rates) stay far above zero. Add all the job losses into the pot and the fact that households have record amounts of debt secured against the market value of their houses, and you can see what happens to the attractiveness of having a mortgage.
If you think, as some poster in this forum did, that modern “economic policy is far too sophisticated” for this to happen, then look at Japan – it has happened exactly as I have laid it out above over the last 10 years.
Part of the problem therefore, and what has helped inflate the UK real estate market is this blind conviction that property prices can only fall if interest rates rise. This has come about because there are very few witnesses still alive that would remember a supply-side recession (and “considered wisdom” is so rabidly united that they wouldn’t be listened to anyway). It’s much like calling the earth flat, because that is your experience of it. Not so much “considered wisdom” as collective foolhardiness.
Steve, I’ve explained it again here. I also put longer term data in previous posts. However, you asked for how much real property prices have risen since the war. In 1945, the average price of a house in the UK was £1,115. Today it is £117,398 (both according to the Land Registry). In 1945 the Retail Price Index was at 25.4. Today it stands at 690. Thus the average 1945 property was worth £30,289 in today’s money. So, in real terms, real property prices have gone up little more than 3 and a half times since the war – or a de-compounded rate of 2.33% - and that includes the recent bubble! So much for it doubling every 10 years!
Everyone else appears able to understand the concept Steve, so, I’m sorry, you’ll just have to read my previous posts (and those of others) if you still don’t get it after this… |
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More interest rates fallacies exposed
by rev.hk
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#1000328
of 3278
24 Oct 2002
11:13 AM |
Think practicalities as well gents !!
A lovely ending that sadly doesn’t befit Reality’s own piece. In it, the great interest rate fallacy is rolled out once again. Interest rates where high – supposedly – in 1989 when the UK property market took a tumble. Interest rates are low now, so the market shouldn’t fall that much.
I’m sorry Reality, but this is nonsense. Interest rates were negative just before the crash in 1989 - once you stripped out inflation. Up to then, it was easy to make money buying and selling property since your monthly outgoings to the bank were less than the property was rising in value. Debt levels weren’t that high and once inflation and bank interest rates fell to neutral levels things were fine. Property prices fell sharply, but not by that much.
This time around, things are very different and a whole lot more sinister. While the property market is defying gravity, all other prices in the global economy are under huge deflationary pressure….including the service sector. Falling prices and low interest rates equate to high real interest rates and it is these which drive economic cycles and long-term personal liabilities.
Real rates now are higher than they were before the crash of 1989 and affordability is crumbling quickly as wage growth has stopped. Also, because personal and corporate debt levels are so much higher than before, there is a lot more of a plunge on the menu than existed in 1989. Imagine trying to sell property when all prices in the economy are falling and you have just realised than your pension savings have gone with the collapse in equity prices. What’s the point of having a house – even if you own 92% of it – if you haven’t got any money to live on when you retire. Think about it……..
Reality also mentions a nice little nugget that only a small proportion of the property market actually have outstanding mortgages. Ergo, any market fall should be small. Sadly, this is nonsense too. To go back to Hong Kong in 1997, it might interest you to know that only about 25% of the market had outstanding mortgages since Chinese people are highly debt averse. The property market is down by nearly 70% since the peak. If Reality is right, then how come prices have fallen so much? You might also be interested to know that in 1995-97 when the bubble was forming, the maximum mortgage available was a mere 70% of the asking price for a new building and 50% for one older than 20 years. Even with huge piles of money in bank deposits, property prices still collapsed. Why?
Well, the answer is quite easy if you want to hear it. Prices were wildly over-valued to begin with and when the music stopped there was a rush for the exits because people wanted to realise their winnings or minimise their losses. The banks also tightened up the terms of their existing mortgages and asked for more collateral and a spiral of events forced many to liquidate their liquid assets…see my earlier note on the effects of falling equity prices on household liquidity.
Last, but not least, UK pontificators seem to be oblivious to the overseas class. The buy and let crowd, along with many at the luxury end, are not UK residents. Many are from Hong Kong and other parts of Asia. After the internet bubble burst and sterling fell sharply against the greenback, many bought UK properties to let. The yield was great. Even now, I could walk out my door, nip down to Pacific Place and buy a house in St. John’s Wood.
Corporate properties are the latest fad being pushed by London property agents here. They’re offering double the natural yield if you buy a flat and rent it to the safe-hands at of JP Morgan and Citigroup who prefer to put their staff in apartments than hotels. Many – not me – have bought and many are now about to sell. Sterling is up 10% this year against the US dollar and most have made a further 50% on their London property holdings. There is a huge amount of Asian money ready to exit London at the first sign of trouble.
It’s all about relative value ladies and gentlemen. Very few of you seem to understand that risks and rewards go up and down in tandem.
Bonne chance
Rev.hk |
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Housin
by Reality from Bucks
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#1000327
of 3278
23 Oct 2002
09:22 PM |
To Guest David I suggest you will wait a very long time. You assume that everyone has a high mortgage debt burden which is of course, not the case. It is only the first time buyers that MAY do so. Also, the cost of borrowing from 10 % odd down to %5 has meant that for the same outgoings, a person can now borrow up to 40 % capital. That is the distortion.
Many will simply not sell - in the village next to mine, there are properties that are weel into the £1/2 M range. At the time of the last bust, We expected those prices to drop, sell ours and therefore upgrade in on reduced differences. Did it work ? No - because they were simply not selling at the bust period [much to the annoyances of the 3 estate agents in the area.] The ones that were selling were the transient properties that those who had perhaps overstretched themselves.
One final point - remember that the last real property crash was also the result of big increases in interest rates as much as job losses etc. With rates remaining low for quite some time to come the debt is unlikely to increase through having to service interest rates. The last property did not see a 40 % drop and given these current circumstances will be unlikely to drop that much.
If the crunch came for me ? I simply hold on - 3 years to go on my mortgage with less than 8 % of it in debt [ie 92 % equity] tell me why I should sell ? There are many others in a similar position and to date from colleaugues, friends etc who are buying, most have well over half of their property in equity.
Not everyone needs to sell at a point in time that will create the need for a 40 % drop !!
Think practicalities as well gents !! |
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HOUSING
by Steve
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#1000326
of 3278
23 Oct 2002
08:56 PM |
Re Martini Thank you for your data for period 1989 - 1994 House Rises vs Inflation. Perhaps you should extend that from 1989 to 2002 !!
A further analysi from 1971 to 2002.And even 1945 to 2002. Now compare the figures ? |
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