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| The UK housing market: a bubble about to burst? |
A few more comments
by Engineer
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#1000653
of 3278
 12 Nov 2002
03:09 PM |
Jeff Morgan,
You are correct, it is not feasible to predict the future with any accuracy. I believe that I have stated this previously. However, even chaotic systems do tend to follow an attractor, and it may be possible to try and recognise patterns that might re-occur. Granted, they may not, but I suspect that the probability of a sudden change to a completely new paradigm is quite low. I would suggest that if people believe that we are in the midst of such a radical change, then they should be able to come up with more effective arguments to justify their beliefs than I have read on this forum to date.
The point about risk and return: just because you get a low return, does not imply that the risk is low! However, if you want a high return, then generally you will be taking on a higher risk. My point was that those who gear themselves highly (in this case by investing with a mortgage - borrowed money) are expecting to get a high return on their own original capital, and indeed have done so in the last few years. However, if the market retraces its rise, then they potentially risk losing more than they originally had to invest due to this gearing - quite speculative!
The position of a particular individual is of no real consequence to the debate. There are also a large number of people who are not in your enviable position. If you invested in property early on in the current boom, then there is probably little risk at this stage. You may lose any "gains" that you believe you have made, though, if you maintain your current position. However, if you were to take on a large mortgage now, then I do believe that the risk would be very high. People caught up in manias tend not to evaluate the real risk properly.
As for certain people wanting the housing market to collapse, that is undoubtedly true and some have provided their reasons for this, which appear valid to them. It is also true that many people have a vested interest in the housing market not collapsing, for reasons which appear perfectly valid to them. Personally, I do believe that a decline in prices from their current levels is necessary if the competitiveness of Britain in the global marketplace is to be sustained, since improved communication makes location less important, and high living costs impact on the costs of goods or services produced for the global economy. However, I also believe that these large swings are really detrimental to the country in the long run, and need to be damped down in future as a matter of policy (eg by reverting to more traditional lending multiples, ensuring adequate supply, and reducing speculation). Perhaps there should be an independent body with various economic 'levers' available to them, whose goal is to maintain house price inflation in the same band as inflation in the rest of the economy.
In recent years, those who have taken on large risks by speculating with borrowed money have done very well, but they should not necessarily expect this state of affairs to continue indefinitely. To those such as Knowledge is Power, who currently find themselves in a difficult position, I would advise patience. People with large debts will not always be in the driving seat, especially if a low infation environment is sustained. |
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Crash Dummy
by Rob G
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#1000652
of 3278
12 Nov 2002
03:05 PM |
And another thing...
Look at this graph and tell me you aren't heading for a fall.
http://news.bbc.co.uk/1/hi/business/2435763.stm
Also remember to factor-in the forthcoming recession, which *is* coming, believe me. |
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To Jeff
by Rob G
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#1000651
of 3278
12 Nov 2002
03:00 PM |
So Jeff,
Why do you feel the need to own a second property, just out of interest?
People who wouldn't dream of buying anything else to rent out seem to think that buying a house to rent is money for old rope.
The housing market is a fundamental part of life in this country, and unlike stocks and shares, is a limited resource that is a necessity to everyone. I think that angling to make a profit on it is bordering on immoral when there are so many people who can't afford to buy *one* home to live in through no fault of their own purely because of speculators such as yourself.
I really do hope it all goes badly wrong and that anyone who was stupid (and greedy) enough to invest in buy-to-let in the last 3 years come out of it with a nasty sting in the wallet. My only regret is that there will unfortunately be a lot of first time buyers in the same boat.
I'll be waiting to buy your 2nd place for cash in the knock-down auctions, Jeff.
Would you consider buying up the local waterworks and selling water to the local residents at a profit? |
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odd thing
by jeff morgan
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#1000650
of 3278
12 Nov 2002
02:51 PM |
Si mentions 'repaying debts' as though debt money somehow disappears from view, never to return. I did not assert that all the money released from housing would go directly into equities and bonds - just that, as long as money is not kept in old socks, it definitely goes somewhere and part of the somewhere is equities or bonds.
I redeem my debt by paying lumps of capital to my mortgagor, the latest lump being £40,000 in September. I assume my mortgagor doesn't put that in their collective sock but invests it either lending to someone else or buying equities / bonds or overnight lending; on it goes on the money-about...
Heigh-ho, where does it all come from, where does it all go... |
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Let me rephrase...
by Si
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#1000649
of 3278
12 Nov 2002
02:42 PM |
'Tis true that those WITH a mix of stocks and property may have the spare income to go into bonds/shares etc. However, if industry, consumers and govt are forced to repay substantial debts (any housing-correction being part of a wider credit-retrenchment) then this would effect employment (minus; could reduce demand for nice lettings too when young professionals lose their jobs and go home to live with Mum), dividends(-), and taxation(+). Considering the scale of the indebted masses, industry, and increasingly govt aswell, then I suggest that the investment-power of affluent parties is outweighed.
My initial comment was a little quick off the mark I'm afraid! |
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optimism!
by Si
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#1000648
of 3278
12 Nov 2002
02:08 PM |
'Unless people are going to keep their money in old socks a housing crash will probably mean more investment in equities and / or bonds.'
How about paying off all this massive consumer and business debt (ie a wake-up call), not to mention the government's increasing debt? Recession instead?
Also, if a house-price crash occurs, it's not as if people can retrospectively sell their homes at earlier valuations in order to pile into stocks and shares.
Feel free to add comment! |
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Please help...
by jeff morgan
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#1000647
of 3278
12 Nov 2002
02:00 PM |
I've been catching up since last Thursday. My observation is that the rates of contribution to this forum is becoming unsustainable and we are due for a crash soon.
Having read good contributions, either way, I seek some further explanations, if you don't mind indulging me.
The past as a predictor. I think Engineer (#535) wrote that the past is the only predictor we have. True, but I believe the housing market is chaotic, with unstable equilibria and islands of stability. The problem is, we don't know where we are on the map and so can't tell whether the system is going to 'flip' on applying a factor such as house price increases. I'm not sure that we can predict in that situation.
The housing market is the same. I see that many contributors to this forum make a distinction between London and the rest of the UK; I'd also make a distinction betwee, for example, the Cairngorms and the rest of the UK, at least from the point of view of the housing market. I consider that the assumption of homogeneity isn't correct and may invalidate some of the arguments. Is that a correct view?
Clare on renting. Everyone has a choice and I'm not going to make simplistic calculations about the relative cost of renting and mortgaging over the long (25-year) term. All I'll say is that, since the second world war, mortgaging has been seen as preferable in the UK, as opposed to the position in (for example) Germany. Has there been a fundamental shift in that position? Will there be such a shift?
I'm somewhat intruiged by the relative value of house prices just now. There are many assertions that they are historically high and I admit that's what I believe as well. But, if house prices after the crash of the late '80s - early '90s only recovered their 1989 levels in 1999, not allowing for inflation, and if the total inflation in the period was (I don't know but say..) 20% - well wouldn't it follow that, in real terms, house prices are now less than they were in 1989?
Finally, Engineer (#641) reiterates that risk and return are related. I'm not clear about the point though; returns in the rental sector are down from 1 year ago but I don't see the risks as any the less! I certainly would not buy to let at this point though I would buy to live in (pace Clare). As it turns out I don't need to do either.
To finish this ramble, how many people are in my position, with no mortgage on their main property, a large mortgage on a second property but covered by long-term rental income, two stable salaries plus stable return on equity investment? I suspect it's not uncommon - and what would a crash in housing prices have to do with us? Unless people are going to keep their money in old socks a housing crash will probably mean more investment in equities and / or bonds.
I repeat an earlier comment; I get the impression that some people want a crash, to punish people they don't like. That's not an argument for there being one. And, this forum started in June when an imminent price crash was suggested by some, but then a price crash has been predicted by some since Summer 2001, so what's new. |
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Si - Like the post!
by Knowledge is Power
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#1000646
of 3278
12 Nov 2002
01:32 PM |
Si,
I think the maths speaks for itself. Nothing flash, but shows the thread.
Wish we did have 40k as a deposit!
Silly in three years we've gone from being able to afford a 2 bed terrace, to not quite a 1 bed flat (different towns mind you - we don't live in Aldershot).
We weren't in a position to buy 3 years ago, now that we are/will be, we can't as the prices have gone silly.
Game of 21 anyone! |
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What about this then Knowledge is Power?
by Si
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#1000645
of 3278
12 Nov 2002
01:12 PM |
Can I add to this - feel free to be critical of this maths (it is simplistic and by no means takes into account all the monthly compound-interest rate stuff, but 'tis a broad illustration:)
On a £210,000 house in your area:
20% deposit, £42,000, invested in a house it's NOT making money in a savings account (obviously), at a net of 3% you're losing £1260/annum
£16,800 mortgage, 5% rate, £8400/annum. (£700/month interest only)
Total £9660/annum, unrecoverable mortgage costs, plus sundry maintenance (anyone for a new roof?)
versus your rental: 12 x £725 = £8700
True, would have been nice to buy 3 years ago, which probably represented good value for your landlord who is now profiting from your rent. But of course by comparison with someone buying at the moment, you are also profiting from the buy-to-let market, as you are better off, as things stand, renting. I wish I'd bought three years ago but that's life. We can only deal in the present, my friend!
(and I agree with you on the quality of life bit, by the way, from where inate value LONG TERM flows from the property market; wise investors don't buy 'up and coming' areas as a whole, esp. in a boom) |
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Si - Interesting postulation
by Knowledge is Power
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#1000644
of 3278
12 Nov 2002
12:41 PM |
Si,
Interesting postulation.
We pay £725 on rent a month for a house that I'd value around £210k. Using the BBC mortgage calculator (for quickness *), purely on the base rate (4% with no added mortgage lender interest), over 25 years the monthly repayment is £700. So if we bought the house we live in now we'd be looking at £700 a month plus what ever the mortgage people would add to the base rate. So all in all we pay less to rent than if we bought the house (now).
But…
Lets say the house's fair value is £120k and we bought at this price. Using the above interest rates & length of term the base is £400 a month. So, if we'd bought 2-3 years ago (when we could of afforded it), we would be paying £300 less a month (excluding the mortgage lenders cut).
Fair value I think not!!
We'll rent and live in comfort thank you. Rather than buy & live in a "deceptively spacious" 1 bed flat!
It's about quality of life for us I’m afraid.
* http://www.bbc.co.uk/homes/property/mortgage_calculator/ |
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A question for Knowledge is Power
by Si
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#1000643
of 3278
12 Nov 2002
12:14 PM |
A genuine question here. I've found that where I live, rental is now directly comparable to mortgage-interest on comparable properties. Once maintenance is taken into account, the only way I would gain from buying would be on the assumption that prices further increase in the future, so I could gain from someone else paying more for a property which, going by rentals, doesn't really have enough underlying value to justify this. A bit like dot-coms 3 years ago....
Thus I would be highly geared into an inflated market - as compared to paying less rental than my ongoing unrecoverable mortgage costs with zero capital risk! Even if I could buy a property for cash, then I would be nearly as well off investing my cash elsewhere and using its income to pay most of my rent, at low risk! My question is whether you could say the same about rentals compared to property-prices where you are?
Bear in mind that headline-rentals in agencies' windows can be haggled, just like the price of anything when supply is greater than demand, and you'd be surprised how cheaply you can get places if you talk to a few landlords and ask around, if you seem a good tenant. |
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Loosing sight of the real issue
by Knowledge is Power
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#1000642
of 3278
12 Nov 2002
11:55 AM |
Pushing the economics/numbers discussion aside, let me explain why I personally feel that house prices are overvalued.
Myself, a research scientist, and partner a solicitor have a combined salary just shy of £45k. Using the traditional lending multiple for a couple (x 2.5), this gives us the opportunity of a mortgage of £112,500. Let’s forget about deposits and all that for now, as this is beside the point.
What can £112,500 buy in my area?
Well, we’d be pushed to buy a 1 bedroom flat in Aldershot. (not really in the most desirable of areas category). And that really is about it. No joke, we couldn’t buy anything else.
The question is therefore, does this appear fair value? Should we stretch ourselves to x2.75, or x3 multiples? Or how about a 110, 120 or 130% mortgage?
Well we, and I would assume most other non brain dead people in our situation would not to this. It’s a too big a risk for such a little gain. We’re getting married next year & planning a future which will include a family. A 1 bedroom flat in Aldershot is not an option, and certainly not at that price!
If you think this is unreasonable, then lets hear it. There isn’t a single person out their who could convince me that we should consider this fair value. No way, buying now is a mugs game, the market has neared it’s peak & lost sight of the real underlying fair value of housing. Only when this is restored would we consider buying. The risk is simply not worth the gain. |
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Stop dreaming
by Engineer
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#1000641
of 3278
12 Nov 2002
11:47 AM |
Hoogstraten, your last post reveals your true position. I quote:
"I have refinanced mortgages for lower rates recently – perhaps my credit rating is lower than GE!"
So it appears that you are a property speculator, up to your ears in mortgages (note the plural). No wonder you choose to mock those who present clearly thought out scenarios that predict your downfall, as your ability to construct a reasoned argument supporting your position appears rather limited!
I fear that you are dreaming yourself into a nightmare. You yourself have stated:
"We have entered a low inflationary cycle which is characterised by generally lower returns."
Does this apply to property too? I guess you have already started to experience lower rental returns. Did you realise that the potential return on investment is generally related to the risk of the investment? Highly geared property investments may have produced some spectacular returns in recent years. But then so did dot.com shares, at one point.
I suggest you consider waking up from your dream now, and evaluate your risks more closely. Gearing works just as effectively on the down cycle as the up! |
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Japanese mortgages
by Si
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#1000640
of 3278
12 Nov 2002
11:46 AM |
Hoogstraten,
Hasn't most risk already gone out of the Japanese property market owing to its earlier capitulation, so mortgage-risk is therefore lower in Japan than the UK, therefore hitting their credit-spread less? |
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Reply to DryMartini
by Hoogstraten
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#1000638
of 3278
12 Nov 2002
11:17 AM |
I have not read the article that you refer to in the FT – in any case, I do not intend to regurgitate the last thing I read, as many of the more hysterical types are prone to do.
You say that the “credit crunch is already here”. If a small increase in 30 year bond spreads constitutes a credit crunch, then I suppose I will concede that you are correct in a trivial way. If we accept that the credit crunch you speak of has occurred, presumably now the readers of this website are facing massive hikes in mortgage rates. Not so. I have refinanced mortgages for lower rates recently – perhaps my credit rating is lower than GE! Have we seen massive increases in Japanese mortgage rates due to their non-performing loan portfolios? No.
You seem to be suggesting massive mortgage interest rate hikes, followed by the crash of residential market. In my opinion, mortgage rates are more likely to go down rather than up in the foreseeable future. We have entered a low inflationary cycle which is characterised by generally lower returns. Mortgage lending still provides the retail banks with relatively low risk income, as mortgage payments remain extremely affordable on current exposures.
Maybe another martini would chill you out....
ps. What do you against bank tellers? What did they ever do to you? |
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