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| The UK housing market: a bubble about to burst? |
Thanks
by Horsefly
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#1000355
of 3278
 25 Oct 2002
05:56 PM |
Thanks to rev.hk and Guest A for your interesting and very different replies.
We will just have to wait and see which prediction is more accurate. Maybe the price correction in the UK will not be quite as severe as it was in Hong Kong, which was also affected by the change in status in 1997.
I am not going to buy now as I am already priced out of the market for anything nice in London, and do not want to find myself stuck living in a grotty place with or without negative equity! |
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Knowledge is Power
by Martin H
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#1000354
of 3278
25 Oct 2002
05:50 PM |
If as you say in your post there is going to be a large buy to let sell off, that will mitigate the lack of availability in many areas, which is the real prop for the market.
If we build as few houses as we did in 1927 then what do you expect? Then there were fewer people, living in extended families. Now there are more people and we live separately. |
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rev uk
by john k
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#1000353
of 3278
25 Oct 2002
05:39 PM |
no need to be nasty. i am a civil servant (secure job) and have a 10 year mortgage (not 25). Security was a top priority when deciding to buy. I dont think you should start being nasty to people, thats just bitterness.
goodbye |
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buy to let
by Knowledge is Power
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#1000352
of 3278
25 Oct 2002
05:32 PM |
Clearly, with the falls in stocks and lower interest (saving) rates, the Buy to Let boom has been very tempting, to make a fast buck. But, as the returns on Buy to Let falters (as they are in London with falling rents), this could trigger a mass exodus of selling…like a snowball rolling down a hill, gathering momentum & size. Remember, a large amount of investors are corporate & they will act in a different manner to private investors, selling at the earliest opportunity to release the highest equity they can.
The housing boom has fuelled false belief in real values and led many to take on staggering amounts of debt. In my opinion this will be the nail in the coffin, and cause the downward spiral of house prices. Think about it, last time, houses were repossessed because unemployment & rising interest rates meant people couldn’t afford to pay back the biggest loan of their lives. This time round, the actual value of personal debt will increase (in relation to the money in your pocket). Someone who owes £100k, will suddenly feel like it’s £125k or £150k. Mortgage Equity Withdrawal is at record levels, people are loving having more money in the back pocket, but they’re lining up for a fall. When interest rates fall further & inflation hits near zero, things will get really tough. Low Inflation won’t decrease your debt, or help you save, nor will it help business either. Not the time of loosing your job, or loosing your home, but it will happen to those out their who are too foolish, too ignorant, and too greedy to look and listen. |
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You don't own your house, the bank does
by rev.hk
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#1000351
of 3278
25 Oct 2002
05:21 PM |
Newboy has taken this forum to new depths....and it is almost tear-inducing it is so naive. I can hardly believe what he has committed to words.
Mate, if you bought your house this year, you still have 24 years to go before the bank ceases to have a claim on your property. If at any point you cannot supply the bank with the cash to pay the mortgage your house will be re-possessed. To put it simply, the bank owns your house until you've cleared your debts. You do not.
If you, and others, don't realise this - never mind the sordid effects of deflation on mortgage repayment schedules - then may the Lord protect you. |
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Will some one please give me a convincing argument?
by DJW
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#1000350
of 3278
25 Oct 2002
04:46 PM |
I have yet to hear a convincing argument on this forum of why house prices will keep on rising?
The basic argument/ mantra seems to be supply and demand, but this has been disproved by the Hong Kong argument( same situation there but prices still dropped) and the fact that there is a net outflow of people from London. Also with more people being priced out of the market - won't the property market just stagnate at best - as people have assets that they are unable to sell? No buyers means that sellers will have to drop their prices. If I'm a buyer and prices are dropping, why should I not wait for prices to drop even more?
Also - equity is not the same as liquid cash. There are only two prices with an asset. The buying price and the selling price. What happens in between is irrelevant. Just because the house has gone up by 20% - does not make you 20% richer - UNLESS you actually sell the house. Why can a house not drop by 40% if it has risen by 40%?
The case for why the bubble should not burst has NOT been made. It has been made on personal opinion (I have 92% equity in my house, my friends are in similar situations so therefore the market is fine) [see #1000327 of 347].
On the otherhand the case for the bubble to burst has been made because:
-Nationwide's own figures prove it [see my earlier post]
-deflation (HK and Extra Dry)
Please - someone put forward a convincing argument on why the bubble won't burst, and why this time it is different to the what has happened in the previous 30 years of history.
Give me a compelling logical reason rather than regurgitated dogma. |
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Top of the market, some replies ot questions...
by rev.hk
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#1000349
of 3278
25 Oct 2002
04:38 PM |
Dear Guest A, and a fan. I suggest you read my earlier postings on the Hong Kong property market. It is a tighly constrained market with limited supply and previously had people making the same arguments as you guys in favour of never ending price increases. We now have interest rates at less than 0.5% and property prices that are down by 70% since their peak in the autumn of 1997.
Dear Horsefly. The answers to your questions are easy. Go on holiday with your money. Take a year out. Do something, anything, other than listening to amateurs that simply do not understand why inflation is about to go negative and why this spells the death-knell for the UK property boom.
Will the market crash?
Yes is the answer because property prices are miles above their fair value and international credit markets are beginning to signal higher interest rates on risky loans. Tighter credit means less loans available to iffy debtors like first time buyers. Fair value is directly related to how much people can afford and it is quite clear that UK property is becoming less and less affordable for first time buyers and more sophisticated investors. When prices are this far out of whack, the return to normal is quite often very violent.
Should you own a house anyway?
Only if you have paid it off, have zero debts and you have a large stash of cash or gold. In all other cases you are mad even thinking of buying property in the UK. It would be like buying BT at 15quid a pop. I know someone who did.
Buy to let?
Buy to let is second worst property investment you can make at the moment. The first being buying and just living in it. My spies in London tell me that they have never seen so many properties available to rent. As I explained in a previous posting, when London property agents are swarming all over Hong Kong trying to push the buy-to-let story it is a sign that they are getting desperate for clients.
What to look out for?
There are two easy ones. One, transactions volume and two, wages & salaries, particularly in the retail sector. The first one is important in stockmarket watching since transactions volumes always drop dead well ahead of a market correction. If you get a hold of some data on the NASDAQ in 2000, you’ll see that volume died about two months ahead of the plunge in April. The same will be true of the UK property market although the lead time will probably be longer given that it takes longer to sell a property.
The second indicator will show you what is happening to a) affordability and b) debt servicing. Focusing in on the retail sector is important since this is where a lot of the money from mortgage refinancing is being spent. When wages and salaries growth turns negative (and it is practically zero) then you will be certain that prices cannot advance very much farther and people will start to focus in on their mortgage obligations. In simple terms, when wages fall, it means retail sector profits are falling, which means demand is dying and people are less confident about the future. The wages data is more accurate than high street sales since the latter is often doctored by retail companies.
A few other points-:
Extra Dry, you make an interesting remark about the lower end of the market offering the worst value. Apologies for sounding like a one-note band, but this is exactly the experience in Japan, Hong Kong and Singapore from 1990 to 1998. Buyers (or whatever name you want to use) tried to get better deals by moving into more ‘affordable’ properties near to the top of the market. In most cases it was first time buyers with new families and mouths to feed. In Hong Kong’s case, anyone who did has lost about 75% - 50% within the first six months of the crash - while the rest of the residential market is down by about 10 percentage points less. A good point that one.
Lorraine, if the price of your house was to fall to zero tomorrow then your neighbour – presumably – would also be paying zero rent. It would be a very strange world indeed if houses were free but it cost money to rent them. I cannot understand why – after so many postings describing why inflation will not bail out the debtors this time – you still believe that prices will continue to rise. It is truly mind-boggling. |
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I agree
by a fan
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#1000348
of 3278
25 Oct 2002
03:46 PM |
| as per previous post, low interest rates & pure demand will mean more increase before petering out |
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Housing
by Guest A
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#1000347
of 3278
25 Oct 2002
03:35 PM |
To horsefly - I answer your questions as follows-
1 I do not believe prices will crash in the next few years. A petering out from the present rates is to be expected and there will be more linear increase along the way eg rises of £10k' and £20k's rather than compounded increases. It is clear from previous postings that people have got under their belts, so to speak, many years of equity built up and do not necessarily have to sell. Perhaps the first timers if unlucky may have a problem, but if interest rates are to remain fixed more or less [Cheshire Building Society do a 25 year fixed at approx 5.69 %] and people organise themselves properly [eg mortgage protection schemes etc]then a brief interlude of unemployment should see them through [many will get redundancy money as well. As of course, not everyone will think along these lines vis a viz mortgage protection etc, then we may see a gradula petering out.
2 If there was a crash and you could comfortably afford it do you keep it ? Of course you do because if you do not then either downsizing or renting becomes the choices. Indeed, as a previous posting showed very well, and as happened where I live, people do not have to sell. In fact, it could be argued that you could even upgrade as the differentials [in theory] become less.Remember that its only when when you cash out for whatever reason , that it becomes important as its at that time that the value becomes cash. Otherwise, stay put.
3 Buy to let. Not a good time to buy for that purpose right now. With prices high and general rental returns low in comparison, its best to hang onto the money. It will also alleviate fears and provide a cushion for any problems that may arise concerning job losses etc.
4 Prices will continue to rise I think for a further 2 years at a plus inflation basis until we have a proper corection of affordability to prices [ - low interest rates have meant that for the same monthly outgoings you can borrow more than in previous years]Once this level has been acheived, then prices will peter out. However, with the middle market in house buying, for example, a rise of £20k for a 2 bed to sell and the same person buying at £30k more for a 3 bed will ensure these price rises will continue to move upwards. The net effect is of course only £10k. Unfortunately within this inner circle of the middle market are the newcomers who will effectively feel the pinch of the full effect. At the older upper end of the market there is downsizing and inheritances to pass down as well ensuring the market stays stable in the long run. The solution ? More houses on a large scale to cater for the demand is the only way prices will in the long term drop.
I hope these answers your questions. Any others care to respond ? |
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Four big issues.
by Horsefly
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#1000346
of 3278
25 Oct 2002
02:48 PM |
Just to clarify things for me, I have come up with four questions. I would be very interested to read any responses.
1) Is the housing market going to crash in the next few years?
2) Even if there is a crash is it worth owning the property you live in if you can comfortably afford it?
My guess is that the answer to both these questions is yes. (for the South East anyway)
3) Is now a good time to invest in Buy to Let?
Having read some of the posts about deflation, I would guess no.
4) How much more (and how much longer) will prices rise before the crash?
My guess is that with interest rates so low house prices could go considerably higher yet, as long as confidence remains high and other factors remain unchanged. |
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Enough about houses (for a second) what about Equities?
by Rob G
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#1000345
of 3278
25 Oct 2002
02:48 PM |
Just a quick aside - apologies in advance for an off-topic posting.
Extradry Martini, O-font of all knowledge and wisdom, what are your views on the current state of the equity market - are UK shares currently realistically priced or are they also going down the toilet with the property crash?
While saving for a house, I'm deciding whether to pay £500 per month into an ISA or play it safe and stick it in my Cahoot account with the rest of my monthly savings... |
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house market
by new boy
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#1000344
of 3278
25 Oct 2002
01:33 PM |
I have just found this forum and trying to read as many posts as I can!
I entered the market earlier this year and at the back of my mind I was fearful of a crash but after weighing up the options I entered anyway.
Now I have settled in my home and I am so happy that I have no fear about the property market because I still have what I have. The prices have gone up anyway (and I have saved £4,000 in rent) so if prices dipped by 20% the loss wont be crippling.
If you know you like a place and know you can afford it (VERY IMPORTANT!) then go for it. In my profession my salary will rise according to exam progression so should I ever want to move upmarket in 5 years time it could be an option.
I do understand the worry though for first time buyers. But good luck. |
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Housing
by Lorraine
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#1000343
of 3278
25 Oct 2002
12:31 PM |
To the guest Matini Dry. But the point is that I know own something, in this case a house of value 250,000 pounds and NO housing outgoing. Under your scenario, I would own nothing and STILL be paying rent. Result would be no extra income that others spend on rent to enjoy life with. If my house suddenly tomorrow was to sell for Zero then I will STILL have no housing costs to find whilst my renting neighbour would. That can only be a no-lose situation, which could only be matched by my neighbour living rent free in her house - a very unlikely situation.
And there are many of my age in my position.But for a new starter I can perhaps start to understand what the potential risks are. |
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Bubblicious...
by Extradry Martini
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#1000342
of 3278
25 Oct 2002
12:18 PM |
Lorraine,
I suggest you go back and read the previous posts to which you refer. They make it quite “specifically” clear that the passage of time will NOT ease the debt burden as it has done in the past – in fact, it is more likely that the burden will increase as a result of deflation. In other words, the exact opposite of what you claim. In your last statement you say:
“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.”
This makes no sense. Her example rightly suggested that BUYING was not the sensible option. Paying interest is just as much throwing away money as is paying rent, yet the interest element in her example was higher then the rent. You right to say that you can also lose your home if you can’t pay your rent. But if you lose your home if you can’t pay your mortgage, and house prices have fallen, you have a debt to pay for a very long time. It’s called negative equity, and there are still many people paying off loans from the last housing bust, despite the fact that average nominal prices only fell 14% last time. Also, you make the assumption that there exist parts of London in which buying is still cheaper on a monthly basis – there aren’t.
The problem is that too few people really analyse what has made buying houses and paying back mortgages in the past so easy. This is understandable, as the economic analysis involved is relatively deep, and not accessible to everyone. As a result, and with all due respect, people like Lorraine are convinced that the market will always go up on a long-term basis. The more people that agree, the more convinced they become (actually this is when they should become more wary), but no one is doing their homework. What amazes me is the number of intelligent (very in some cases) people that are blinded by their own experience and think that real estate prices will always go up - you try to explain to them why they cannot, but they don’t want to hear it – they just repeat the mantra: “Property is a good long term investment”.
So, Clare:
You are right to say that prices are unsustainable and your reason for saying it is right. There are two good ways of measuring fair value, monthly cost to rental price and outright cost to average earnings. Both indicate a huge variation from fair value in the real estate market.
Rick:
It would be very interesting to know whom the person you went to hear talking was. All I can say is that he is absolutely wrong, and what he has said can be easily disproved. Think about it. If there are two classes of society, those that always rent and those that own property, then the owners must be letting to the renters. But if the mortgage payments are beyond the affordability of the renters, then it follows that renters are paying much less than what they would pay in a mortgage. This in turn means that the letters (the property owners) are receiving less than they are paying on their mortgage, so they are losing money. If they are losing money, then there is no reason to own the property that they have let and they sell. If the letter of the property does not have a mortgage, then he can get a better return by selling and lending the money than he can by renting. As a result, there is a natural convergence between monthly rental prices and mortgage interest payments, and this why the rent to mortgage payments ratio is a good indicator of market fair value. So, I have to say that the man was talking complete rubbish. In fact, he has provided the biggest indicator of the last phase of a bubble – what I call the “new paradigm” argument. This is saying that economic and market forces have changed so much that the current valuations are not only reasonable, but represent value, when they are too high by any traditional measure. It happened in Japan in the 90s, in and in the US stock market in 1929 and 1999.
Let’s get back to the “permanent demand” fallacy. An increasing population does not mean increasing demand. Demand can change in an instant, as Rev has demonstrated in his excellent examples of the Hong Kong experience below. Remember the early 90s in the UK? It was the other way round - I bought a house in London in 1994 and everyone told me that my timing was awful as there was no demand on the horizon, but most people are wrong most of the time and it happened to be the bottom of the market.
This, again, is typical bubble talk as what has moved the real estate market in the past has had a little to do with demand and supply and a lot to do with inflation. Inflation is now dead and property is overvalued by every measure. However, I you may believe what you want to believe (and what the mass believes), rather than do a proper economic analysis of the situation, and go ahead and buy anyway, as again, this is how bubbles work. If you do, I guarantee that in 3-4 years at the latest your house will be worth at least 40% less.
Rick has raised another interesting point. He says that he is looking for a cheap part of London in which to buy. Does no one remember what happened in the last bust? The people with the highest negative equity were those in “cheap” areas. This was because the word “cheap” in that context meant (and means again) affordable, rather than any kind of quality/price determination. The trouble is that this means that the “cheap” areas are also the most over-priced for what they are and those that fall in value the most in a crash.
Horsefly: I can tell you that the Madrid property market is even more inflated than the London market. Because of inflation, property prices have NEVER gone down in Madrid – and as a result people are even more convinced that they will keep going up. Rents have fallen by 15% this year while property prices have risen by 25%, resulting in it costing less than half to rent than to buy on a monthly basis, so the capitulation point is not far away. |
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Don't Panic
by Horsefly
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#1000341
of 3278
25 Oct 2002
10:52 AM |
| Rick - I don't think you should be panicked by the "gentleman" who gave a talk in the city. You have a nice flat now, and if you are like me you can probably afford to save 20% of your salary by making only small sacrifices to your lifestyle. If property in London becomes permanently unaffordable, you could always relocate to one of the other European cities where the property is more affordable and the weather is better too! |
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