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| The UK housing market: a bubble about to burst? |
media property owners
by Lulu the Cat
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#1000713
of 3278
 13 Nov 2002
02:05 PM |
For a lovely example of a home-owning journo, trying to convince himself and others that all is rosy with the current housing market, I refer you to the link below to an article by the editor of the Independent entitled 'Don't Panic! The Housing Market is Rational'.
Don't Panic |
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Zorro
by Si
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#1000712
of 3278
13 Nov 2002
02:02 PM |
| I think you'll find that a rational market would take rents received as an implicit factor in the valuation. Just as in the same way dividends on shares apply in a rational market, like when dotcoms crashed. |
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Risk management
by Shareholder
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#1000711
of 3278
13 Nov 2002
01:43 PM |
Engineer....Property is an investment not a business....
Agree or disagree?
So we apply risk management to an investment with a cyclical market subject to supply and demand and government intervention.
The rents received are the cream on the cake and take very little effort to obtain (agree or disagree).
I am sure Zorro knows he is better selling to his tennants than marketing the properties. I assume they are all on shorthold assured tennancies and he could ask for re-possession any time when the leases expire. Then perhaps they are not!!!!! |
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Risk management
by Engineer
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#1000710
of 3278
13 Nov 2002
01:33 PM |
Zorro, you are a wise man to manage your risks.
I don't suppose you happen to know how your ex-tenants who are now buying your property are hedging their risks?
You are most generous to sell your houses at below-the-market prices. But hang on, surely if there is a willing seller and willing buyer, then you are actually making a new market price? Does this not simply confirm that the downtrend has already started in certain areas?
To stir the pot on another subject, what about the concept of windfall taxes that have been applied to businesses that have made gains from a limited resource? Could this not be applied to your recent windfall too? Presumably your business would be viable without massive asset price increases, otherwise it seems to be a slightly odd business...
I would be interested to hear comments from people with professional expertise in risk management. How is risk determined in such a market, and what is your assessment of the current situation. |
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The Meja
by Rob G
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#1000709
of 3278
13 Nov 2002
01:13 PM |
Jon,
You are right in saying that the role of the media is crucial.
Unfortunately since most journalists own their own homes (one would assume) there is much vested interest in their not rocking the boat as they have as much to lose as everyone else. This is one reason why I believe coverage may well be kept to a minimum until it is all too late and the story has developed its own momentum.
I was probably not alone here in seeing the pathetic 4x4 'documentary' the other evening commenting on the pricing boom.
It was interesting to see the 'balanced' debate on the likelihood of price falls.
While the journo predicting a decline in prices may well have been believable (apparently he also predicted the last price fall and received hate mail as a consequence) - it was quite obvious that the chap who was saying that prices will rise strongly next year had his tongue firmly in his cheek in the manner of a News of the World journalist defending as true the story of 'London Bus found on the Moon'.
I doubt they would have found an economist willing to put forward that view who had any kind of reputation he wanted to preserve.
Unfortunately, the public should be treated with rather more respect I feel, and some kind of Morey Poll of economists would have been more helpful than grabbing the first pair of hacks the researchers could find with opposing views.
Very poor. |
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Zorro ..You are spot on with tax,but......
by Shareholder
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#1000708
of 3278
13 Nov 2002
12:34 PM |
You didn't mention Inheritance tax, they do not class rented property as a business, they count it as investment.
Any comments? |
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Mass psycology
by Jon Lumb
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#1000707
of 3278
13 Nov 2002
12:32 PM |
Hi all,
Just found this forum while browsing around the subject at other sources.
Very interested to read about the mass psycology ideas. IMHO, this is going to be very important over the coming months, the role of the media is going to huge in any moves the market makes. I am a young professional looking to buy, and as such I have been trying to educate myself about the market. There seems to be a massive amount of statistics and agencies bouncing stats about. Interestingly the lenders stats always seem to err on the side of a booming market.
There are well reasoned articles starting to appear in the papers about the bubble and possible burst. I'm sticking with renting at the mo and hoping the papers can generate a bit of mass hysteria so I can buy at the bottom of the market!! |
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Buy and be free.......
by Shareholder
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#1000706
of 3278
13 Nov 2002
12:29 PM |
Well Rob G I take your point in the short term but not in the long term.
However, a lawyer friend once told me that in English law a freehold is technicaly a lease from the Queen for no term and no fee. Does anyone know if that is correct since technicaly all land belongs to the crown!
House prices are cyclical and subject to supply and demand and many other factors.
The benefits of ownership and freedom are for ever.
i have owned my own home for many years and also rented accomodation to tennants on a lease. I know where I prefer to be. |
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I am hedging my bets
by zorro
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#1000705
of 3278
13 Nov 2002
12:27 PM |
There will be a credit crunch and the house prices will come down. People will stop buying as they will be too fearful and they won't get a credit anyway (not necessarily in that order).
So where will they live? They will rent - or many of them will. This will be a boost to the buy-to-letters who have stuck in there. The rents will stabilise and go up. Buy-to-let will again be good business. In recognition of this fact, the government will slap extra taxes on that sectors.
I was made redundant from the public sector in 1995 and by chance really fell into the buy-to-let. I pride myself on having provided an excellent service at fair rents to my many happy tenants and (touch wood) I have not had any dodgy tenants either. I have done OK but I feel that I deserve it. It has been a full time job like any other and I have taken great risks with capital, and even with the roof over my own head.
I am now selling half of my portfolio, at below-the market prices to my tenants. The fact that they want the flats they are in which they know intimately shows that they are happy with the quality. As it happens, they will all be paying by some 15% less in mortgage costs than in rent (we are talking London SW), and know that nobody will ask them to leave when it is not convenient.
I am keeping some flats as I will need some income after all. Before you all jump down my neck, consider that I have been competently providing a necessary social service at a time, when
1. this government has abdicated its responsibility for housing the non-property owning classes completely
2. the government is in fact putting pressure on housing associations to put their rents up to the detriment of their tenants who hail from the poorest stratum of society (who is a slum landlord now?
3. there is less newbuild going on in the UK then at any time since about 1965
4. private rented sector account only for about 15% of the housing market.
Under the circumstances, and having worked (willingly) very hard at what I do)a point I feel strongly about is that I feel it is bloody cheek for the Inland Revenue to class income from property as 'unearned income' Believe you me, I earn it all right.
Secondly, why is rental property classed as a 'non-business asset'? Buy-to-let is my business. For those of you who don't know this, Capital Gains Tax on business assets goes down to a mere 20% after just two years of holding the asset, whereas for non-business assets such as my flats I have to pay CGT on the 100% of the gain for the first three years and then it only tapers very gradully to remain at a hefty 60% of the gain after 10 years.
So if the Chancellor is seriously worried about the overheating property market how about changing the rules on CGT for buy-to-let as outlined here, thereby inspiring quite a few buy-to-let landlords to bring their property back to the market willingly rather than under duress, thus by increasing supply lowering the prices? |
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Sorry
by Engineer
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#1000704
of 3278
13 Nov 2002
11:58 AM |
| Sorry, my calculating ability is poor, but at least it is within a safety factor of 2! |
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socio-economics, and how much freedom buying actually confers...
by Si
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#1000703
of 3278
13 Nov 2002
11:52 AM |
Jack,
Sorry if I got a bit heated, and thanks for the sobriety of your reply.
Allow me to expand re: the ripple effect. This is characteristic of previous booms, and has become bigger each time - presumably because the country is that bit wealthier each time, and with it the number of private mortgagees. That is in itself basically economic in nature.
Anyway, the last time this happened, the farthest extremities reached were, alongside the obvious ripples WITHIN London and the SE, some parts of Manchester (which was the first northern regional city to start to embrace the 'new economy' in place of industry), East Anglia, one or two picture-postcard areas of the West Country. Socio-economically, they were driven by, but did not drive, the economic boom. When the boom of the late 80s collapsed, it was areas such as these that experienced some of the worst negative equity - in some cases prices have not recovered to this day. Socio-economics suggested to people that maybe, in order to own their own place, they could risk an up-and-coming area, whereas, in many cases, this turned out to be the biggest financial mistake of their lives, because the areas in question did not have the qualities to FUNDAMENTALLY JUSTIFY THEIR VALUES. The overall economic trend of the boom and bust of this time ultimately ran roughshod over people's aspirations of large-scale spontaneous gentrification.
The fact that people have been unfortunate enough to end up on a flood-plain or in a rough inner-city area generally doesn't drive the economics of the housing market on anything but a local level. It's a symptom of a perceived social need to go and buy houses as quickly as possible, which is just a psychological part of the asset-boom. I concede that demographics drives the long-term trend in the UK, but it's not as if an expanding population is unusual in the UK - there's nothing new there - and if anything it's likely to level off. Record low housing construction will have an effect, but I don't believe for a minute that this contributes any significant component of the 30% rises we have seen this year. For example, the fact that Liverpool is set to lose 10% of its population is apparently lost on the investors buying up flats there and making it a new hotspot to invest in in the North. It's an economic boom riding rough-shod over socio-economic influences.
It WILL be interesting to see if any correction is ameliorated by lack of properties in the SE, but there is no lack of properties in most of the regions, esp. the North which I am familiar with, so perhaps these 'up-and-coming' areas that people are keen to invest in will, again, suffer the most. Only there are more of them this time.
Rob G,
Re: #669, I agree with you. And will add that when you decorate a house it is necessary to follow some reasonably neutral decorative scheme to appeal to future buyers. If you get a 1 year+ unfurnished letting and your landlord susses you out as an ok tennant, then he/she will often let you add your own touches anyway. A senior colleague of mine who lets out a few houses is quite happy for tennants to modify the decoration, including in 1 case block flooring, providing it is not outlandish and he can use the deposit to make any fixes at the end of the letting to appeal to future tennants. It is a fallacy to believe that when owning your house you can decorate however you like AND then move whenever you like, if you are responsible for the costs of such decisions, although clearly recently the massive house-price gains have outstripped these costs. |
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A story
by Engineer
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#1000702
of 3278
13 Nov 2002
11:33 AM |
It seems that there are quite a few contributors who are "desperate" to buy, and a number who would encourage them to do so. I wonder why? My suspicion is that, were the market to turn, then those first time buyers who are now "desperate" to buy would no longer feel the same urgency, and might be quite happy to rent for a while longer...
I think that a lot of people are not evaluating the risk properly when putting money into property at this stage.
Clearly, the gains from purchasing property can be spectacular, due to the leverage or gearing that is inherent in buying with a mortgage. If we assume that over the last 4 years or so the price of a typical property in the South of England has doubled, someone who purchased 4 years ago with a large mortgage would be sitting on a massive gain. Lets relate a little fable to illustrate the points:
Mr X purchased a house for 100000 pounds, with a 90% mortgage, about 4 years ago, and similar houses are now selling for 200000 pounds. For the sake of simplicity, let us assume that the costs involved in paying the mortgage have been similar to the rental value of the property over the period (so if Mr X lives in the house, what he would otherwise have been paying in rent has gone in buying costs, and if he is an investor then his buying costs have been covered by the rent he has been able to obtain as a landlord). Now his capital gain on his original 10000 pound deposit over the last 4 years is about 2000 percent - quite tidy!
Naturally everybody else is quite jealous that he has made so much money from doing next to nothing, and wants to get in on the act too - hence the demand increases. Of course there are probably speculators who have managed to leverage themselves even more, remortgaging property number 1 to obtain a deposit for property number 2 etc. All will be well, as long as enough people "keep the faith" that property investment is as "safe as houses", but will they?
Mr X was fortunate in his timing, and his risk was relatively low since the asset class had shown fairly stable price behaviour for some time and was probably near "fair value". He probably didn't have expectations of quite such large gains, either. The longer the price instability persists, however, the greater the risks become that the underlying assets are overvalued. At some point enough people may notice that the "emperor has no clothes".
Mr X now has a dilemma. He could rent his house for cheaper than the interest he is paying if he is living in it, or his rent is no longer covering his interest if he is a landlord. Mr X1 "keeps the faith" and takes these "losses" in the hope of continued capital gains, but Mr X2 decides that he has done well enough and tries to cash in on his gains just in case the market has peaked? Mr X3 decides that he likes living where he is, and housing is not an investment after all, but a place to live. However, because he is now so much wealthier he feels it is not unreasonable to upgrade his Ford to a Mercedes. Not a problem, remortgages are available, and it is possible to release a little of that wealth.
Mr Y has just graduated and is earning a decent salary and has managed to save up a small deposit. He is worried that he will never be able to own a house if he doesn't buy now, but is worried about the cost of doing so. He is thus most upset, and believes that Mr X1 has taken his birthright away. He would like to upgrade his Nova to a BMW in a few years like Mr X3, too.
Mr Z is not as well educated as Mr Y, and doesn't use his brain that much - he prefers to go with the flow. His local friendly estate agent has just told him that there is never a better time to buy a property than now, given that interest rates are so low. Property is a sure bet, and he cannot lose. He puts down a 5000 pound deposit, and takes out a 195000 pound mortgage, and buys the property from Mr X2.
Now it is up to you to finish this happy tale. Who wins and who loses, who is happy and who is in tears? And who can be blamed, since clearly none of the actors in the drama should take any responsibility for their own actions... |
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Semi Has It
by Rob G
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#1000701
of 3278
13 Nov 2002
11:21 AM |
On the psychology of the market, Semi-Detached has it right.
As soon as a plateau is reached (and remember this is a plateau in *public perception* which may come after an actual plateau), the buyers who are panicking and throwing themselves into the market in abject fear will begin to hesitate.
Then imagine their thoughts:
Prices are dropping. If I buy now I'm sure to be forever in negative equity. Why should I buy now only to be certain to lose thousands as the price of my new home drops?
NOBODY WILL BUY
A housing doom and gloom scenario will descend in exactly the same way as the current glee of owners 'making thousands every month'.
Not until houses start to appear so ridiculously cheap that you are certain not to lose money on them in the long run will people have the courage to buy again.
This is exactly how the market will work, and I think that this is exactly the reason why Extradry Martini is correct in his assumption of a 70% drop.
Supply and demand won't even come into it. Fear will prevail on the way down as well. It's a 2-edged sword and always has been.
Now would anyone here care to say I am wrong about this and explain hows this psychological analysis is incorrect? |
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Been saying it for ages!
by Knowledge is Power
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#1000700
of 3278
13 Nov 2002
11:20 AM |
Check this article out;
http://www.thisismoney.com/20021113/nm55533.html
My earlier comment is much the same as this article, which is quite spooky.
Agree with the earlier comment on emotion affecting the market. I really believe that the By to Let market is going to be this housing markets downfall. Remember, there are many corporate investors in the By to Let, having had their fingers burnt on the Stock/Bond market already. One sniff of a levelling/wobbling market & they’ll be selling quicker that a rat out of an aqueduct! And low & behold the market will get very saturated very quickly leading to a swift “price correction”. |
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Buy And Be Free
by Rob G
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#1000699
of 3278
13 Nov 2002
11:07 AM |
Shareholder,
On your comment:
'There is a lot more to having your own home than straight economic or financial comparisons. You can do what you want move when you want and live where you want, decorate as you want and have the freedom of mind and spirit that goes with being in your own place.'
How can you move when you want when you are up to your neck in negative equity?
How can you decorate how you want when you have no spare cash because the lenders have cranked up interest rates to cover themselves against inflation/deflation?
Anyone who stretches themself to buy now might well find themselves wishing that they had rented and instead had 'freedom of mind and spirit' instead of a 22 carat albatross around their neck... |
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