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| The UK housing market: a bubble about to burst? |
newton's house
by jeff morgan
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#1000522
of 3278
 07 Nov 2002
01:08 PM |
In response to Tress (#516), which of newtons's laws?
The one that says, 'left to itself, a body will continue in the same direction at the same speed'?
Or the one that says, 'if a force is applied to a body it will affect the direction and speed in a way proportionate to the force and the direction of force applied'
I'm not sure which of those currently apply to the housing market. The balance of demand and price, not only different in different sectors, seems to be pretty close at the moment.
I live in a part of London where the only effect of the previous property crash was to stall house prices and jam up the market. The factors that caused that to happen - good schools, easy transport, brilliant shopping, closeness to open space - they are still in operation, so I expect the same effect if there were to be another house price fall. Anyway we have no mortgage on our main property, and the mortgage on our second (acquired randomly but let out anyway)whilst large, is no great danger and should be clear in 5 or so years.
I don't understand the vehemence sometimes expressed in this forum when anticipating house price falls. I would think a lot of people in our area (which I suppose you would call prosperous and desirable) are in the same position as us, and would be little affected by house price falls. The people who would be affected are those who can least deal with the stress, couples or singles just getting on the ladder (possibly with families) who need house price falls like a hole in the head.
I am hoping for what seems to be happening, a gradual slowdown in prices that makes housing generally more affordable especially for people who currently don't have the means to get their first place. If the current unaffordability were to continue it would be bad for everybody, and the sooner that stability is confirmed in the market the better, as far as I am concerned. |
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singletons
by Si
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#1000521
of 3278
07 Nov 2002
11:40 AM |
David,
the glut of 20 and 30 something singletons, according to demographic trends that I am aware of, has already happened. In their wake is a slightly reducing number of people in these age-groups, also more indebted than even this generation - more of them are graduates, and graduates are now leaving uni' with £12k of debt, before they've even hire-purchased a car to drive to their harder-to-find graduate professional jobs! Anyway, it could be argued that the demand for family-homes will increase as the current demographic bulge of singletons starts pairing off and having sprogs, whilst the following generation will be even more skint through borrowing than this lot, and lesser in number.
If this happens (and who knows, maybe everyone will just stay single), then the price-pressure in the near future may increase on family homes and decrease in 1/2 bed 1st time buyer properties. |
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Ignore the noise
by Extradry Martini
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#1000520
of 3278
07 Nov 2002
11:35 AM |
John,
While I recognise that you have done your homework more than most inflationists in this forum, you are suffering from two misconceptions that are very common in speculative manias.
The first is a belief that the economic forces driving price change have changed forever:
“…. historical comparisons are not that valid.”
The second is a belief that there is an organisation out there that can control the market or bail people out when things get rough:
“Do not underestimate the government's fear of deflation. they will do whatever is necessary to ensure this does not happen, currently the best driver in the economy to stimulate growth is the housing market”
I’m not sure what you think the government could do to stop the real estate market from collapsing even if it wanted to. At the same time, the only thing I have seen the government say or do is to promise building a load of houses in the South East for public sector workers – not what I’d call supporting the market. If by government you mean the central bank, I’d say that not only are they not capable in themselves of avoiding a deflationary recession but also that they are nowhere near concerned enough about deflation. Rates are at 4.00% (for half an hour or so at least!) – they should be 1% - 1.5% lower.
Events overnight in the US prove this point. The Fed cut rates by 50 bp (by the way a 50 bp difference is the same whether rates are at 1.75% or 17.5% - the proportion to rate levels is irrelevant to the change in monetary conditions). Why did they do this? To try to avoid the vicious circle of lower confidence leading to lower asset markets which means destruction of capital/collateral thereby worsening credit conditions and “wealth effect” leading back to lower confidence. So, has it worked? Given that the immediate effect was a lower stock market, I’d say that it hasn’t.
So, no, there is no “organised support” (a phrase coined during the 1929 Wall St. crash) for the UK property market – there will be no bail out and no one to wipe away the tears afterwards. Anyone that has taken on too much risk in their home loan/property purchase should know that the problem is theirs and theirs alone – no one gets a free option on their house when they buy it. However, I dare say that all those people paying off huge amounts of money for the rest of their lives will find someone other than themselves to blame…. |
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demand for different property types
by david
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#1000519
of 3278
07 Nov 2002
11:24 AM |
I agree with Rob that "3-bed semi's" and similar properties are less risky to drop in price as they are not typically buy-to-let. 1/2 bed flats are more likely to be so there is more likely to be a exodus of landlords in these types.
However, it is well documented that more single 20 & 30 somethings are buying properties and divorcees also buy these types of properties. Could this keep the demand up?
What I would be worried about from the 3-bed homeowners point of view is that wouldnt a drop in the price of one-beds generally pull down the price of the whole area? |
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Germany by comparison
by Si
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#1000518
of 3278
07 Nov 2002
10:57 AM |
John, I think everyone would agree that a sensible family home such as a 3 bed semi, in a well-located, nice suburb (as opposed a small terrace in an 'up and coming' inner-city area that really isn't that nice or desirable in the long-term unless there's a serious social shift in the majority of the inhabitants) will be least effected by falling-prices elsewhere in the market, and will regain any lost value most easily afterwards if that happens. This is because there will almost always be a demand for this kind of property, not just speculative.
I'm glad that you think 'first time buyer properties will become more affordable', as it is this area that appears to be silliest at the moment.
But I am very interested in how you describe Germany as 'the norm'. I'm no expert, just throwing an idea in to add to the debate, so please take this as constructive:
Am I incorrect in saying that the German banking system is much more heavily regulated and, in some cases, propped up by the German govt? It is since deregulation of our banking system in the early 80s that we've experienced a greater magnitude of housing price swings.
Therefore, do you think that such regulation and intervention could happen here, to prop up house prices to help stop us going into deflation?
I suppose that this could give another 3 years' growth or more, but then beyond that we'd just have to see if the economy was capable of sustaining those prices. Of course no-one can see that far into the economic future very reliably. Germany is conspicuous by the fact that it's house prices have been stagnating (I believe) albeit at a high level. Does this government-propped banking system really help the German economy, or would a correction there be beneficial in the long term for Germany?
As a complete aside, how much do the company-owned housing schemes effect these things in Germany - reducing volatility perhaps?
Please feel free to clarify/correct my ideas as they are all 'off the cuff'. |
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Hey, lots of strong feelings!!
by john
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#1000517
of 3278
07 Nov 2002
09:51 AM |
loads to reply to so here goes:
Clare 508: Great sympathy but the problem you are having getting onto the ladder is a result of high equity higher, up the ladder, greedy investors hitting the buy to let market. Typical buy to let is first time buyer domain, hence lack of supply, increase price (to buy) and the apparent cheaper rent over mortgage costs.
This will change, landlords will start to move out of a market that they see as getting riskier, and first time buyer properties will become more affordable.
However, the next rung on the ladder, typical family 3 bed semi, will not fall in value as it is not generally in the buy to let. You will be able to get onto the ladder, but climbing it will prove difficult.
Incidently, this "structural" change could be described as taking us towards the norm. Take Germany for example, people tend to rent until they are more asset secure, and will buy in their mid to late 40's. the typical loan to value will be 45 - 50%.
Rob 510: Agree Public sector workers are required everywhere in society, not in localised pockets. the scenario of schools falling in standard being cyclical would be possible if we lived in a vacuum. Goverment is aware and will act. Schools and commuter links will continue to drive prices for those people not affected by fears of unemployment.
Engineer 511: I did say cheap in perception. Houses are becoming very expensive viewed historically, but viewed on mortgage interest payments, they look cheap. levels of disposable income spent on mortgages are still low and will make consumers look to buy. We will see lenders extending their terms, we are already seeing 50 year mortgages being offerred, and income multiples of 4X and 5X being considered.
references elsewhere to "interested parties":
it is these interested parties, who control the drivers in this market: government, fiscal policy, and the lenders.
The market will be stimulated, and the powers to do so, are stong and committed. Note the Fed last night dropping rates by a HUGE 28% (o.5% / 1.75%) we will probably follow today, if not, there will be drops in Dec/Jan.
The market is changing, and when compared to historical situation looks likely to correct, but when you think laterally and how the housing market fits in with the wider economy, historical comparisons are not that valid.
Do not underestimate the government's fear of deflation. they will do whatever is necessary to ensure this does not happen, currently the best driver in the economy to stimulate growth is the housing market. We may be stoking up problems for later, but there are short term problems that need addressed first. The market still has a godd 3 - 5 years stong growth. |
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The uk housing market
by Tress Derbyshire
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#1000516
of 3278
06 Nov 2002
11:48 PM |
tress14@hotmail.com
I have only two words to say on the uk houseing market:
Newtons law! |
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Deflation
by sho_ryuken
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#1000515
of 3278
06 Nov 2002
10:37 PM |
I just want to refer back to the quote "there is a real risk of deflation (ask any md of a manufaturing firm)
so I ask, what will make it burst ?"
Can we just be clear on exactly what deflation is ? FALLING PRICES !! Falling prices mean less revenue for companies, less revenue means less profit, less profit means fewer jobs, fewer jobs means fewer people able to pay the mortgage, and that will spell an end to the property bubble.
Deflation means that people will defer their consumption in the expectation of lower prices to come, and the debt burden of a mortgage in real terms increases, rather than decreases, as people have been used to in the past with inflation.
What makes things worse is that the government can only lower interest rates to zero, and after that there is nowhere to go with monetary policy. We have seen that in Japan, where they are now talking about printing money of all things. Talk about last resorts !!
On top of that the banks end up with a whole load of bad loans as companies go down the tubes, then the whole banking system collapses. If you don't believe it could happen, just look again at Japan, which used to be one of the most successful post war economies. There was a time when nine out of the ten biggest banks in the world were Japanese; now look at the state they are in.
Trust me, deflation would be VERY BAD for the housing market and for the entire economy. If it ever really happens, I would not like to be overstretched with a big mortgage !!
And on the subject of IFA's, when will people stop taking the word of interested parties as gospel ? Whether it is a mortgage lender, estate agent or financial adviser, they are trying to get money out of you, so they do not give impartial advice about the state of the housing market.
On top of that, nobody can see into the future, not even them. The phenomenon we are currently seeing is based on consumer confidence and nothing else (except hot air). When that goes, the housing market collapses. When that will be, nobody knows, trust me on that one. Not even Nationwide or the Halifax know what is going to happen when.
Anyway, if the mortgage lenders think the housing market is just fine, why did they beg the Bank of England for a rate rise a few months ago?? Maybe because they are petrified that if it doesn't slow down soon they are also going to be facing a lot of bad loans and worthless collateral to flog off for whatever they can get for it. |
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Relative Value
by Extradry Martini
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#1000514
of 3278
06 Nov 2002
05:15 PM |
I have a much better idea of where to put your money. The strategy is as follows:
Australia is currently quoted at 4-11 to win the ashes by Ladbrokes. This is a return of 36% in 2 months (annualised 216%) on your money and is infinitely more likely than the UK real estate market rising by a similar amount before it collapses. So, sell your house and put the equity on Australia to win. Not only do you make a lot of money if you win, but in the extremely unlikely event that you lose, you don’t end up owing the bank loads of money for the rest of your life. |
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unemployment
by BP
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#1000513
of 3278
06 Nov 2002
05:13 PM |
I think substantial rises in unemployment, accompanied by a sudden change in economic perceptions, will be sufficient to burst the bubble. If total employment in the economy drops sharply, the market will be flooded by houses for sale. Who is going to buy them? Investors? not at these prices and with rents falling. Immigrants? maybe, if the government lets more in and they're wealthy enough, which seems unlikely.
Another issue is how the government will react to the economic (and housing) crisis that is unfolding. Lower stamp duty and more tax relief might mitigate the size of house price declines, but will not encourage the unemployed to buy houses. The government will probably have to unleash a massive fiscal expansion, as the US appears to be doing (not least in the military field).
The problem in the UK and Europe is that the current economic mindset finds its difficult to contemplate such a prospect.
The scarey thing about this downturn is that it is entirely new, at least to this generation. There is no obvious way out. Why does everybody continue to deny the similarities with what happened in Japan? Creative thinking will be needed, and more urgently than we think. |
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Does my FA know FA?
by Rob G
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#1000512
of 3278
06 Nov 2002
04:56 PM |
David, I believe he does arrange mortgages amongst the usual funds, stocks & shares, insurance and the like. However, whether his opinions are based on any privileged information I really can't say. I would suspect that he hasn't had time yet to notice any fall in mortgage applications.
My father's friend, who is a local estate agent is apparently noticing a definite slowdown in demand recently. He's been of the opinion for some time (over a year) that the housing market in the Hampshire area is very over-priced.
Over the last 2 years. I've lost count of the number of homeowners locally converting bungalows into houses and putting large extensions onto their existing sizeable properties. Of course I can only guess how many are installing new kitchens, bathrooms etc. This says to me that many people are running up a huge amount of debt for the future. |
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Back to earth
by Engineer
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#1000511
of 3278
06 Nov 2002
04:56 PM |
Rob G, I recall a conversation with an "experienced" financial adviser about 2 years ago, where I was advised that the stock market would perform strongly for many years due to the large numbers of "baby boomers" with money to invest. Needless to say, the "experts" are not always right.
John, I'm not sure who you have been talking to if you think that the general perception is that houses are cheap or that the economy is thriving, but I doubt it is on this planet! In contrast to what you say, I know a number of young professionals who have seriously been considering moving/emigrating to find a better quality of life, largely due to the excessive increases in house prices in recent years.
On a related note, I believe it is naive to suggest that further increases in house prices could be used as a "get out of gaol" card for the economy. Housing, unlike certain other assets, impacts directly on many aspects of life in general. Why do you think that the firemen are demanding a 40% increase? Why is it such a strugle to recruit teachers, nurses, policemen etc in certain parts of the country? Are inflated private sector salary demands due to high costs of living not partly to blame for the current lack of profitability of many companies?
Remember, there is no such thing as a free lunch, and inflated asset prices create at least as many social and economic problems as they solve. |
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The South: A Services Wasteland?
by Rob G
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#1000510
of 3278
06 Nov 2002
04:45 PM |
In response to the quote:
'There will be pockets where there is a high demand for good schooling commutes etc and for that property, there will be no fall in demand.'
I think this is one reason why things will start to go very wrong. These good schools are likely to become rather less good when teachers are priced out of the area.
The sort of properties which were affordable to plumbers and nurses back then are now the preserve of qualified accountants and software engineers.
Low paid people may have been able to get onto the ladder 4-5 years ago, but there is a whole new class of low paid, public sector employees now who are being forced to move away from the South. The middle class women curently propping-up the education system will retire and there will be nobody to replace them.
I also think that the housing market may have further-reaching social consequences such as discouraging divorce and forcing children to continue to live at home long into their '30s |
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previous comments
by david
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#1000509
of 3278
06 Nov 2002
04:40 PM |
John I do agree that the confidence created in home owners encourages people to spend which is good for the government, however someone quoted that the amount the government recieves through stamp duty is in its billions...no easy sacrifice.
Rob G, does your FA follow the housing market? I ask this because I am following this forum as I am young and would dearly like to be on the property ladder within the next 3 years (or 2!!) and have great interest in the market. I'm not saying your FA does not follow the housing market but would just like to know.
dave |
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Reply to John
by Clare
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#1000508
of 3278
06 Nov 2002
04:37 PM |
| I am one of the successful young individuals looking to get on the property ladder. I earn a good salary, have a lot of savings and yet after 6 months of looking can't find anything I could live in for 5 years. My friends who have bought in the last 2 years in London have high mortgages and dingy flats and will seriously struggle to upgrade in a couple of years time. I pay less in rent for my current flat than I would in interest for the same flat on a mortgage. Current prices are based on speculation of future capital gains. That is why the bubble will burst. |
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