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| The UK housing market: a bubble about to burst? |
Chartist Folly
by Hoogstraten
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#1000728
of 3278
 14 Nov 2002
12:44 AM |
In the Greek world, important decisions were put to the Oracle – a priest on the alter who spoke directly to God. In modern times, in South Africa, a witch doctor throws bones on a drum to provide advice. Many in Western cultures believe in tarot cards, astrological signs, palmestry and reading tea leaves.
The financial equivalent to this form of soothsaying is the chartist. The charts reveal all manner of future double flip twists and so forth to these who wish to believe.
Instead of determining whether prices will rise or fall by reference to rational economic indicators, they simply look at a graph of historic movements, and extrapolate it out from some point. They then determine the difference must be an under or over valuation. The folly of this approach is obvious – why should economic fundamentals imply that the long-term rate of growth of anything is constant or set in stone? What if the economic conditions which underpin or determine the prices change?
ExtraDry Martini seems to me to use this chartist approach, with the result that he makes some wild projections. The last property crash was a result of fundamentals, not charts. The reasons for the collapse were:
1. The ERM fiasco (interestingly, he supports this currency intervention again).
2. Interest rates were ramped up massively overnight by the Government to support the currency. Since supporting the currency is no longer a policy of the BOE, this is unlikely (although again DryMartini wants to return to this policy).
3. The Chancellor made changes to the tax system, which simultaneously bled property owners.
These conditions do not now exist.
ExtraDry Martini then uses the extraordinary anology of the Nasdaq to justify his views. Instead of viewing this in chartist terms, lets consider the economic fundamentals of this crash.
The valuation of shares is determined by the net present values of future cash flows. Chartists bet on the momentum of the future potential capital gains of dotcoms, thereby driving the share prices ever higher. However, it became obvious to the market that the dotcoms’ profits and market share predictions were illusory. Dividends were nonexistent, and these dividends were likely to be zero in the future. The correct valuation, in this instance, was therefore zero, hence the crash.
What, then, is the equivalent of the dividend yield in the property market? It is clearly the rental yield. Is this rental yield on average 0% in the UK, like the dividend yield was for many dotcoms? No.
To the contrary, many property investors bought many years ago. The rental yield on the cost of the property (which their mortgage is based on) is consequently massive compared to the interest costs. If you suggested to one of these people that they should sell their properties for 70% less than market value, when each and every month they were earning income over their costs, they would probably look at you with bemusement.
Even with current market values, rental yields across the country are still generally substantially higher than interest rates. Small parts of London are the exception to this rule – generally some of the more expensive areas have yields slightly below interest costs. A small reduction in prices may occur in these areas, but in my opinion to say that the fall will average 70% (50% price fall plus 20% over-reaction) over the entire country is not supported by fundamentals.
Let us finish with a quote from DryMartini, when he got it right:
“Markets do not make major moves because people talk about them, they move because of changes in individual and general economic conditions.”
General economic conditions (population, interest rates, average income growth, employment etc) have not deteriorated 70%. You do the maths. |
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economic ripple effect in housing
by Jack Straw
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#1000727
of 3278
13 Nov 2002
11:16 PM |
Si,
Thanks for the reply. It’s an interesting theory, that of economic ripple and its danger with regard to house prices at the outer part of the movement. Remember a book I read a few years ago called, “ Stock Operator” – In the said book a wall street legend of the 20’s and 30’s stated he got out of the markets before 1929 crash as,
“My shoe shine boy was recommending stocks.”
It certainly is agreed that current levels are unsustainable, but where does this lead a correction or a plateau? That I guess that is the whole question of this forum.
Martini firmly believes that we are looking at a 50% reduction in housing prices, with a 20% over reaction, although I’m not sure what the difference between a price loss and an over reaction is – does on have a cash implication and the other not? I guess Ill never know. I firmly believe we are not looking at such epic losses. To quote Shakespeare we will see in the future whether martini is
“O you hard hearts, you cruel men”……..
“Where will thou find a cavern dark enough to mask thy monstrous visage”
or
“He is a dreamer, let us leave him”
William Shakespeare in Julius Caesar
Asset liquidity theory states that volatility is exacerbated by the easy of liquidation of the asset and its associated risk. People may close out on stocks to take a loss, but are less likely to do so in a housing environment - you cannot physically choose not to exist within a dwelling as you can chose not to hold a stock. This is why the volatility of the stock market is never see as vividly within the housing market.
But Si, I do agree with you, it is true if you are in an area on the edge of the boom you are more exposed. Popular areas, in the north say Harrogate, will remain popular whether the market is buoyant or in decline. I feel though we are heading towards a stagnation rather than decline. My thought would be that if you have a dwelling now, “you have the tiger by the tail” – to release your grip is far more dangerous than to hold on and see what happens. But I guess time will tell.
Jack Straw
A house owner.
A thought for the board:-
He is one of those orators of whom it was well said. Before they get up, they do not know what they are going to say; when they are speaking, they do not know what they are saying; and when they have sat down, they do not know what they have said
Winston Churchill On Lord Charles Beresford |
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When is it ever a good time to buy?
by indecisive
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#1000726
of 3278
13 Nov 2002
11:13 PM |
I am currently in the enviable position of looking for my first house. I've rented for 9 years, am 27 and earn enough to get a mortage of 115k with a 5% deposit without stretching too much. I'm fed up with moving house every year or so and would like to settle somewhere for at least a couple of years. I work in IT and have been lucky enough to have been pretty well paid so far but fear that in the future, the IT jobs market may take me away from my current base, perhaps back to London as it did a few years back.
I live in the West Midlands in a largely affluent town which has many 'pocket' areas with snob value. There are a large number of people trying to move into the area and this has been the case for 20 years or so. The local council have to build something like 6000 houses over the next few years and seems to have an aversion to building 2 bedroomed houses and would rather cater for 'families' with requirements for 3-5 bedroom properties.
Over the last 2 years I've rented a new 2 bed house for 675/month (the landlord paid 115k). The same style house is now 155k and people are buying without hesitation as the area is 'desirable'. In fact people are buying the new properties before they have laid the first brick (is this fear or greed, probably neither). I would have loved to buy the house I rented but it's now way out of reach and even if there was a crash I can't really see the general area dropping too much as too many people want to buy into the area. Elsewhere in the area, the going rate for a good two bed house is 140k round here and a bad one 120k. This area would probably suffer minimal impact in a crash, as it 'apparently' did in the late 80's. Admittedly the prices look better than London but then again I don't earn as much as I did when I worked in London.
Consequently, I'm left with the option of moving to a less desirable area even though I don't feel my earnings reflect this requirement. I want to try and live in an area which offers the best road transport options and unfortunately this is not possible in the current climate and maybe it won't ever be until I can find a rich partner!
Anyway, I'm being told to buy (even now) and if I end up with negative equity for a few years it doesn't matter, eventually the house value will acheive the value I paid even if it takes ten years or more. If I have to move whilst in negative equity then the next property will eventually pay me back for my losses. Oh and if my mortgage becomes too much then the bank will no doubt let me extend the loan term. Above all (I am told), the main thing is that I have a property of my own. My parents have just sold their house for a massive 'profit' and are under the illision that I can't lose, long term. This is the same message all the FTB's I know get. Its no wonder people jump in whatever the perceived market conditions. It is getting to the point now that my hesitation is causing family arguments. I'm told that I'm over analysing and to just buy a house and if I rent I am mad (maybe renting is socially unacceptable).
I've been following this forum for the last few weeks and have read all of the posts so far get the general feeling that the property market has looked bad for a long time. Anyway, I hope this post isn't too off-subject in relation to recent topics and provides a insight from a worried FTB.
If I buy, I could get stuck in a less desirable area for some time if the predictions of some in this forum come true.
How long do I have to wait and when is it a good time to buy? I don't think anyone can really answer these questions so I am left with taking a risk either way. If I don't take the risk now I probably never will as there is always going to be a risk?!
I feel now though that I have read too much about the 'risks' and most FTB's are far probably less informed and therefore less worried than myself. Things will be just as bad if prices start plummeting as I could end up waiting for the 'bottom' of the market then... |
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Some more thoughts on BTL etc
by zorro
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#1000725
of 3278
13 Nov 2002
06:55 PM |
Si- you are right to say that a rational market would take rents received into account in valuation. Interestingly, in the case of the flats I am selling, the gross rental return is still 6.7% on the selling price, ie quite high compared with the average dividend from FTSE100 of approx. 2%. So for any cash buyers (rather than those acquiring commercial mortgages on typically 5-6%) BTL is still the only show in town, at least in some towns and parts of London anyway.
Shareholder: I still maintain that BTL is business albeit clearly it is also investment as indeed is all business activity which requires input of capital.
On risk management: I agree that excessive speculative activity should be curbed, but it is down to the government to regulate excessive lending by banks. Funnily enough, banks are falling over themselves to lend you money when property prices are high, but are most reluctant to do so when they go down. Talk of herd instinct. It is the banks that wind up this market.
Engineer: when the price of the underlying asset goes up it is not a 'windfall' (even though it might be a bubble) but capital appreciation, as would be with any other asset class.
And now for something completely different: everybody keeps saying how a 30% rise in prices of property is unique, and has only happened once before, in 1989. Am I right in thinking that property prices in Ireland have been going up by 20-30% a year for the past eight years of so and they still have not had a crush, although the general opinion is that one is imminent?
I am not referring to this fact to talk up the present market in the UK, but merely to observe the potential effect of having to keep our interest rate low in preparation for euro entry. |
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sitting on the fence
by Flora
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#1000724
of 3278
13 Nov 2002
06:24 PM |
I don't agree with these last comments
I am enjoying the titanic duel between Extradry Martini and Hoogstraten, and eagerly await their next postings.
What intrigues me is where everybody gets the time to contribute to this forum.
No work to do?
Slumping productivity?
Another sign that the bubble is about to burst? |
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Well said Norman !!!
by sho_ryuken
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#1000723
of 3278
13 Nov 2002
06:06 PM |
I completely agree. This forum is becoming increasingly puerile and it is all down to a very small number of individuals.
I have noticed that most of the childish behaviour is coming from those who wish to talk the market up. Which is a shame really, as I would be interested to hear some intelligent debate from someone with an opposing view to mine. Unfortunately that does not seem to be happening. Maybe all the more intelligent people have realised that a crash is imminent ?
Anyway, I may decide to make another post at some point if we get back to some sensible debate rather than a playground slanging match.
Maybe we could achieve that if people stopped replying to the like of "Van Hoogsraten" with his oh-so funny user name. Or better still, maybe the administrator could cut out his "contributions" which only serve to distract from any sensible discussion.
Anyway, well done Martini, Rev.HK, Si, Knowledge is Power et al - thanks for providing some interesting insight into what is becoming an increasingly dull forum. |
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Hmm
by Norman Normal
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#1000722
of 3278
13 Nov 2002
05:02 PM |
Some of these posts read like the rantings of a sarcastic, domineering schoolteacher.
This used to be a good forum, but I don't think I'll bother reading the posts any more. |
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all hope is gone!
by sparx
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#1000721
of 3278
13 Nov 2002
04:31 PM |
Living in hope,
I’m afraid you’re supporting the argument of the downturners with one of your comments:
‘Oh, and by the way, this supposed downturn in the BTL market where tenants can name their price doesn't seem to have happened in my leeafy part of NW Londoon where despe the plethora of rental properties, rents seen to be at the same levels as 2 years ago.’
If rents haven’t gone up in 2 years, whilst property prices (and therefore costs of financing for new buyers) have risen by ………dunno, 50%? Then surely the BTL-ers could make better use of their money selling now and investing elsewhere (prob more likely for the pro's rather than relative amateurs). And equally might it not be cheaper to rent at the moment rather than buy given the growth in mortgage vs rent?
I also feel future prices will rise – however whether they do so in a smooth manner is another point. I prefer the yo-yoing around a fair value argument, & feel we’ll be having the same discussion in 10 – 15 yrs time… |
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A reply to contributors I have missed
by Hoogstraten
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#1000720
of 3278
13 Nov 2002
04:20 PM |
Apologies – to Knowledge is Power for not replying to his and other contributors mails.
When I joined this site, what I found was DryMartini forecasting a 70% fall in property prices followed by another Great Depression. I have no problem with him making these forecasts – to the contrary, I respect anyone who has the courage to take a stand. However, what concerned me was the reaction to his comments. Other contributors immediately reacted with revolting sycophancy, lining up behind the pied piper of the market to congratulate him and ask his financial advice on all manner of subjects. Contributors seemed intimidated by his “standing”, and therefore unable to dispute any of his contentions, or think for themselves at all. He was the mad prophet of the site, with no one else prepared to walk his or her own paths!
Since my mails I have noticed a healthy increase in scepticism, which is after all what democracy and this forum are all about. Nobody has a monopoly on the truth where economic forecasting is concerned.
I will now reply to other the contributors:
1. Rev.hk. You say that:
“When credit conditions start to tighten as they are now …- banks typically increase their provisions for bad loans. In other words banks increase the amount of money they put away to write off an increase in non-performing loans. They do this because they are protecting themselves and their shareholders from either a hostile takeover which would occur if they suffered huge losses and their share price collapsed or a run on their deposits.”
Incorrect:
a) A provision for bad debts is not cash – it is a journal which debits bad debts expense and credits the Balance Sheet provision account.
b) The reason this is booked is that an important accounting concept is prudence. As soon as the likelihood of a loss is known, it should be expensed immediately. Another accounting concept is matching - expenses should be matched against income in the period that the loss was incurred. This is first year remedial accountancy.
c) This accounting treatment has nothing to do with hostile takeovers, or runs on deposits, or possible alien invasions. It is simply a case of presenting a true and fair view of the financial performance of the bank in the financial statements.
You continue:
“…actions is positive for the property market...unless of course you believe that banks have a duty to provide free lunches for idiots who can't be bothered to make a living through hard work and risk taking.”
You have 5 paragraphs, all of which are drivel such as this. However, as you say there is no such thing as a free lunch. Just because New Labour failed you educationally, there is no reason why I should have to pick up the pieces. I will move on.
2. Si – you say:
“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?”
Capitulation is a term that I associate with fund managers trying to talk up cash equities because they have enormous long positions – these salesmen say you should buy, because “capitulation” has occurred. I suspect this term is largely just jargon.
Frankly, I do not know for sure whether mortgage risk is lower in Japan, but I would suspect that it is not because the Japanese economy is a complete and utter shambles. Irrespectively, against the doomsayers I predict mortgage rates will continue to fall in the UK over the next 6-12 months.
3. Rob G – your first line is “I am no socialist” and then you propose 5 policies – higher CGT, higher stamp duty, a “vacancy tax”, penalties for local authorities who delay planning applications unnecessarily and tax on “luxury” housing.
I tend to disagree with you – I think you are a socialist.
4. Knowledge is Power
You misunderstand me. I did not disagree with the BOE setting base rates – in fact, I support it. I disagree with the BOE intervening directly in currency markets. Have you forgotten the disastrous ERM fiasco? DryMartini and his friends easily rape the Government when they enter the currency markets – and you and I as taxpayers foot the bill.
5. Engineer
I agree with almost all the comments you make. I am touched by your concern for my welfare when you say “I suggest you consider waking up from your dream now, and evaluate your risks more closely”.
I will do my best. |
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When is a bubble not a bubble?
by Living in hope
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#1000719
of 3278
13 Nov 2002
04:12 PM |
There is indeed an obsession with the current state of the housing market, as evidenced by the huge number of people posting on this discussion forum. The consensus is that there is no consensus - we're all travelling blind on this issue.
Whilst we can't deny that prices have risen, my opinion is that it's delusionary to describe this trend as a 'bubble' (and one that is liable to burst, leaving financial humiliation and disarray over the faces of those too slow or stupid not to see it coming).
Isn't it more likely that this is simply a sharp (upward) correction which has finally brought prices to a place where they would have been had the crash of the late 80s/early 90s not happened? Future prices will rise, albeit at a slower rate, but rise they will.
We can make all the forecasts we like, based on statistics, past trends, future trends, the global economy or wishful thinking but at the end of the day, we all need a roof over our heads; the only real question is will it be a rented one or a bought one(or, as in the case of most people, a mortgaged one)?
Oh, and by the way, this supposed downturn in the BTL market where tenants can name their price doesn't seem to have happened in my leeafy part of NW Londoon where despe the plethora of rental properties, rents seen to be at the same levels as 2 years ago.
As for me, I recently sold a one-bed flat which I bought 6 years ago for twice the price I paid for it. My reasons for selling were personal as well as financial but I'm now left in the somewhat precarious position of gambling on whether I should buy a property now, at up to 4x income/mortgage, (a scary thought for a single person with no partner's income to fall back on)or waiting for this oft-predicted but yet-to-happen burst, slump, crash.
Any thoughts on this, anyone? |
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commentators' independence
by Si
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#1000718
of 3278
13 Nov 2002
03:50 PM |
Semi-detached,
I have oft been perplexed by Hometrack's 'independence'. They appear to be a housing stats/data offshoot with very strong connections to estate agents, ie they have a recommended agents scheme, and often sponsor things closely with the association of estate agents, as well as have a close working relationship receiving price and sales data directly from estate agents in order to collate their stats. John Wrigglesworth, an economist of genuine learning and esteem, makes pronouncements in his capacity as their chief economic advisor. His statements are always qualified with low unemployment and interest rates, and are limited to the short-term view that whilst these pertain, the housing market must remain bouyant. He does not enter into (or directly refute) macroeceonomic arguments that may effect these qualifications beyond the short term, that I have heard. I'm sure that he could, but would probably lose his salaried position with Hometrack. Fair enough, he hasn't lied, it's just that the press seem to lap it up and mis-interpret the implications. |
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Lulu the Cat - Don't Panic
by Rob G
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#1000717
of 3278
13 Nov 2002
03:42 PM |
Nice link, Lulu.
'Yet I don't think raw emotion is driving house prices up; fear and greed don't appear to be factors in residential property.'
Well I think we can discount Mr Whittam Smith's entire article just on the basis of this rather glib and poorly researched assertion.
He obviously doesn't speak to very many first time buyers, does he? |
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The Media
by Semi-Detached
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#1000716
of 3278
13 Nov 2002
03:08 PM |
Rob G:
Thanks for your kind words.
I too saw the 4x4 programme. Actually, the guy predicting price falls was, I'm pretty sure, Steven Bell, "global chief economist at Deutsche Asset Management" (and the same guy who wrote the article on Thisismoney.com, referred to earlier, nicked from the Daily Mail). Rather better qualified than a journalist, methinks! And the chap talking up the market was I recall the boss of Hometrack, a company trying to make a name for itself in the house price prediction racket (barely more believable than an estate agent, IMHO).
Interestingly the same two guys were wheeled out for the Jonathon Dimbleby prog the day before - again, it was all woefully inadequate in terms of analysis, but indicative of a trend.
So, in just two days we have two programmes on the same theme and today an article in the Daily Mail, of all places. The media senses a story, and the more people hear these tales of the beginning of the end, the more true they will become. Slowly but surely, and then with gathering pace, we are going to talk ourselves into a house price collapse. Good job, too, for those poor first time buyers and locals being crowded out by rich incomers from London. Just please God let me sell my house and realise the equity before it really heads downhill!
Incidentally, Land Registry statistics indicate that prices of semi-detached houses in my postcode sector (somewhere in the SW) have risen by 75% in one year (albeit these figures are probably based on small, unrepresentative samples). But 75%!! If that's going to plateau out gently, I'll be very surprised. Already there are distinct signs of buyer resistance and a few sharp price cuts, although it must be said it is traditionally a quiet time of year, now.
More hot air.
S-D |
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Here's your trigger
by Knowledge is Power
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#1000715
of 3278
13 Nov 2002
02:19 PM |
Unemployment increases:
http://news.bbc.co.uk/1/hi/business/2458243.stm
Just the start if you ask me. Mind you, if you think these figures are accurate in the first place I'd be suprized. Afterall according to the governement there is:
lower crime
lower hospital waiting lists
the best education system in the world...
yeah right!
rising unemployment = reduced demand = higher demand to sell = increased supply = lower prices. |
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Risk etc
by Engineer
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#1000714
of 3278
13 Nov 2002
02:09 PM |
Shareholder, I would tend to agree with you, I was simply pointing out to Zorro that his desire to classify his property ownership as a business could have implications he may not have thought of. Also, perhaps his motivation is not quite as altruistic as he would like to imply, though there is nothing inherently wrong with his actions.
I have nothing against landlords as such, and I have both rented and bought property over the years with varying degrees of success. I would say that the landlords whom I have rented from have had no difficulty obtaining the rent and have had to do almost nothing during my tenancy, but perhaps I was not a typical tenant. That is really beside the point, I was happy to rent during certain portions of my life, and they were happy to provide the opportunity.
Certainly, I do not believe that anyone should be prevented from purchasing property (even multiple properties) as an investment. However, I am not convinced that investing in more than one property using borrowed money should be allowed, since this is really speculation rather than true investment and tends to lead to bubbles. Wasn't "investment" using borrowed money a cause of the great depression? Your comments?
Is a young first time buyer in the current market in a position to manage their risks? I wonder... |
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