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| The UK housing market: a bubble about to burst? |
The house that Jack built
by Lulu the Cat
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#1000743
of 3278
 14 Nov 2002
12:56 PM |
Hi Jack Straw,
You say: "you cannot physically choose not to exist within a dwelling as you can chose not to hold a stock."
Well actually you can, and I just have! So have several friends and associates who, like me, believe the London market has peaked and want to safeguard the (tax-free and substantial) capital appreciation in their homes. Admittedly it is easier if you are fairly 'footloose and fancy free' (no kids in school etc.) but it's perfectly do-able, and it's a great time to be a tenant.
I don't really get the sense I've released a terrible tiger, in fact having weighed up the risks, I sleep a whole lot easier at night ever since I completed on the sale.
Lulu |
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Born again Chartist – Bubble Trouble
by Hoogstraten
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#1000742
of 3278
14 Nov 2002
12:49 PM |
I have the grim task of reporting to you the development of a massive bubble.
I have charted total global wealth over the thousands of years man has lived on earth. Things were going well for most of this period – the graph shows a very slow and steady increase in wealth for thousands of years. On the graph, total wealth looks almost horizontal for ten thousand years, though it is slightly upward sloping.
The bubble I am talking about began during the Renaissance – the graph actually spikes straight up! I thought we would then return to long run trend, but unfortunately I must report to you that the bubble only continues to gets worse! By the 20th Century, on my graph the world’s wealth spikes almost vertically!
I drew a line showing average growth rates for the first 10,000 years using the first year of man as my base. This shows a bubble to such an extent that we are actually living 500,000 years in the future! I feel privileged to have lived so far ahead of my time, but I am depressed by the knowledge that inevitably this lifestyle will be seized from me as we return to trend.
I have calculated at what standard of living we should be living at, assuming average growth rates. This shows our equilibrium standard of living to be 23.1% higher at this moment than during the dark ages. However, I have read Chartist theory, and I understand that we are likely to undershoot this target for some time before returning to trend (there is apparently a temporary over reaction). It is disappointing to have to return to the dark ages, but charts are charts. Clearly, this bubble has got more out of hand than anyone realised…
Please stay calm. I would, however, emphasise that it is crucial to sort out this bubble problem as soon as possible.
To do this, I think 70% of you need to start smashing technology. You then need to start moving into caves. Finally, to put the bubble to bed for good, I would appreciate it if you live off the land caveman style for a few thousand years.
If you don’t fancy the cave, you could instead use another methodology other than mere chartism to generate your predictions. For example, Si and Zorro use rental yields as a way of determining whether a property is overpriced or not, thereby giving a good indication using present conditions of whether prices should rise or fall. It doesn’t seem as interesting as chartism, because it doesn’t come out with these wacky swings, but maybe it’s worth a go? |
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Slow Deflation
by Gareth
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#1000741
of 3278
14 Nov 2002
12:42 PM |
Here's a thought which I know greatly deviates from the general views expressed on the forum.
Could we not find that house prices just gently increase in line with inflation in the future?
Usually house prices tend to increase broadly with salary growth which tends to be about 1-1.5% above RPI.
Now, I agree that recently house prices have grown faster than they should (hence the bubble), but why can we not have future growth at a lesser rate? i.e. prices can adjust back to a more normal level by slower future growth.
e.g. say prices are about 30% higher than their natural level. this implies that correction could occur over a period of about 25 years, assuming the house inflation's natural level is 1.25% abover RPI.
This would be consistent with the idea that the economy is entering a period of low inflation.
Just an idea, I am sure that many people will have strong counter arguments.
Has anyone done an analysis of the long term growth of property prices above RPI? |
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They are an asset class
by Extradry Martini
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#1000740
of 3278
14 Nov 2002
12:06 PM |
Jeff,
You are right to say that not all house prices will fall at the same rate. But that doesn’t mean that some houses will rise in value.
After all, how many houses have fallen in value (after taking into account relative value factors such as deterioration etc) in the boom? |
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A little knowledge can be dangerous
by Extradry Martini
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#1000739
of 3278
14 Nov 2002
11:55 AM |
Jack Straw:
I think you misunderstood me. What I said was that from current valuations, the average property price will fall 40-50%. That is where I (and the Nationwide) see “fair value”. I then said that asset markets tend to overreact (especially in big moves), which would mean that the down move is likely to be more – perhaps by as much as 20%. I do not think that that is expressing a “firm” opinion! But, no matter!
I am particularly interested in “Asset Liquidity Theory”. In 13 years in the financial markets I have never heard of such a thing. I put the phrase into Google and there were 0 matches – what is it?
I can, however, talk about liquidity and volatility, and categorically say that you have it the wrong way round. There is more unreleased (or pent-up to use an ugly phrase) pressure in illiquid markets than in liquid markets. This means that liquid markets move more frequently but the individual movements and overreactions (i.e. highs and lows) in either direction are smaller in magnitude. Illiquid markets take longer to move, but when they do they go though large price changes. The dealing costs (in bid-offer spread) are also much higher in illiquid markets.
You are right to say that we all have to live somewhere, but you seem to think that means having to buy – it doesn’t.
Lastly, to be a little pedantic, I think you are mixing up your books and crashes. The seminal “Reminiscences of a Stock Operator” was published in 1923 – 6 years before the crash.
By the way, in this and previous posts I have shown the errors in almost every one of your arguments – why do you not respond? |
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To undecided and other FTBs
by Engineer
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#1000738
of 3278
14 Nov 2002
11:54 AM |
Indecisive (#726), your post raises a number of issues relating to first time buyers that I feel are worth commenting on in general, though I do not believe that this is really the place to discuss individual circumstances.
Firstly, I do not agree that the position of first time buyers is currently enviable, quite the opposite in the current market. Secondly, I firmly believe that it is up to each individual to take responsibility for their own actions - it must be your decision whether or not to buy, not your parents or anybody else, as you are the individual that will have to face the consequences.
There is a time and a place for buying or renting, and both are perfectly valid options. Let us consider a few factors that may make renting a sensible option:
(1) You don't have any great need to be "settled" in a particular area (i.e. no spouse, children etc)
(2) You don't want to commit to a possible long-term stay (i.e. 5 to 10 years) in a particular house that you can afford now, and you can't safely afford a house that you would be happy to live in for the next 5-10 years if necessary.
(3) There is a good probability that your work circumstances may change, necessitating a move to a different area within the 5-10 year period.
(4) You haven't yet managed to save up a significant deposit.
(5) The balance of risks versus rewards appears skewed towards the risks when viewing the home as an investment.
This is just a starting point, you will have to evaluate your circumstances with respect to this list (and any other factors that you can think of) and come up with a logical decision.
If indeed there has been a long-term step change in the country's circumstances to justify the current boom, which I for one don't believe, then I still think that property is currently achieving "peak" values with respect to affordability right now. Given that the current economic outlook is hardly promising I cannot see how anyone can realistically propose that there will be large sustained growth over the next 5 year period. I believe the "stabilisation at a new higher level" suggestion is a red herring, designed to prolong the current boom by making buyers discount the downside risk. Nobody has yet to post any examples of past situations where this has occurred in the markets, so I will have to assume that they don't exist. It is probably as likely as a coin settling on its edge, rather than flipping to heads or tails.
What would your circumstances be like if there were a drop in prices to 40% or more below current levels, as some are predicting? In your case, a 120000 pound house would decline in value to 70000 pounds or less. Your current 6000 pound deposit would be wiped out and you would be left with a 'negative' of 45000 pounds or more if you sold, ignoring the buying and selling costs involved etc. Given that it seems to have taken you 9 years to come up with a 6000 pound deposit, it could take you some time to recover from this debt. Sure, you only realise the loss if you sell, but then the same applies to any gains that you make if prices increase. For people such as you, property is not really a viable "investment" as you don't have enough money to invest and can't afford the potential losses! Discount the potential for positive returns to the same extent as you are discounting the potential for negative returns, and then you will be in a better position to make a decision.
If your parents feel so strongly that you cannot lose, then get them to deposit some of their massive "profits" from property (eg 45000 pounds) in a separate account, with a commitment that if the negative scenario were to come about and you end up taking a loss, then they will bail you out. They shouldn't have a problem with this if they don't perceive any risks, and it will force them to put their money where their mouth is. Perhaps this will reduce the pressure somewhat, and you can be left to make your own decisions in your own time.
Those who would belittle the possibility of a 40% drop or greater should remember the following. It would not be uncharted territory, unlike the ever-increasing lofty heights currently being reached. Not that many years ago, in fact, many people would have thought that prices 40% below the curent asking values were eminently reasonable, if not expensive! A lot can happen in a couple of years! |
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IHT poser
by zorro
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#1000737
of 3278
14 Nov 2002
11:52 AM |
| Good question. Unfortunately, although I have set up a company now, so far all my properties have not been under its umbrella. I certainly intend to trade properties as a co. from now on. So, to date I personally have not solved the problem, although I am contemplating a Nil Rate Discretionary Trust (see eg www.littglos.co.uk). Other suggestions welcome. |
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homogeneity and correlation
by jeff morgan
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#1000736
of 3278
14 Nov 2002
11:51 AM |
I made my prediction, my finger in the air. As with all predictions it's based on two false assumptions: that one can generalise then apply the results to the particular, and that the past is a strong guide to the future.
The UK housing market is inhomogeneous and won't all go the same way. In my area (the only one I can truly speak for) the most likely effect of house price reduciton is to jam the market even further. it's actually very hard to buy in our area, few houses are transacted. We have lived here for nearly 18 years and are not unusual. People want to move here, but if prices fall few will have an incentive (or pressure) to move out. So the market will effectively cease to operate.
I guess local conditions such as this will cause different areas to react differently. Earlier postings about East Anglia and Cornwall indicate that factors not even present in my part of London are significant there. So while it is possible to say 'prices will fall / rise by x%' that won't apply in any specific case - just as, statistically, no-one is of average height.
My unease about charts comes from my mathematical and statistical background. They are observed time-based correlations and, like all such are useful if not trusted too far. 'History repeats itself, but never in the same way' and correlations can alter as well.
None of this is to attack Extra Dry's prediction; in the end though it is simply a statement about the future that will be tested only in the fulness of time. In the meantime if someone wants to assess whether to buy or rent I think the local factors (location, location, location) should be the final decider. |
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A question for Zorro............
by Shareholder
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#1000735
of 3278
14 Nov 2002
11:31 AM |
How do you intend or have you thought of limiting IHT.
Most family business is free of IHT.
Not so for property renting, it is considered as making or holding investments and not business. It could also be considered as dealing or trading!
40% is a lot of tax on the family wealth.
Is it something you have considered or taken advice on?
Ps. I am not a tax inspector, so feel free to answer. |
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Hoogstraten comes of age..
by Extradry Martini
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#1000734
of 3278
14 Nov 2002
10:49 AM |
At last, a post from Hoogstraten in which he hasn’t disqualified what he has said by using insults – welcome to the adult world!
I will therefore address what you have said.
I applaud your attempt at valuing property through the present value (pv) of future rent income. However, you also need to calculate the pv of total mortgage payments. If rents are lower than mortgage payments (which they are in many parts of the UK, especially London) then the mortgage is too large. If rents are to fall even further, (which they are doing in many parts of the UK, especially London), then the mortgage is even more extreme relative to the pv value of the property.
You said:
“General economic conditions (population, interest rates, average income growth, employment etc) have not deteriorated 70%. You do the maths.”
You seem very confused by economics. I think what you probably mean is that GDP has not fallen 70%. No it hasn’t, but nor did grow 150% in the last 7 years – you do the maths.
You appear equally confused by what has happened in the US stock market. The bursting of the dot-com bubble was only a tiny forerunner to the bursting of the telecom bubble and wider stock market bubble. The amount invested in dot-coms was miniscule compared to that in telecom companies which in turn was nothing compared to the amount of capital destroyed in non-tech stocks in the last two years.
You said of chartists:
“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”
What? Where did you get that from? Chartists do not extrapolate to find fair value at all. They work on the basis that all investment decisions are made by humans, and therefore are subject to the same set of human emotions (chiefly fear and greed), which in turn create patterns that are repeated throughout price history. Once one of these patterns has confirmed a certain number of characteristics, then there is a very high likelihood of them performing others. It is not an exact science, but it is often a better indicator of market movement over the short and medium term than fundamental analysis. It certainly has been so this year, and I have had a record year as a result. Charting works especially well when investors are being emotional, and that is why every graph of every investment bubble is identical. Look at the DJIA 1928-32, the price of gold 1978-82, the S&P500 or the Nasdaq in 1998-2002. Put a chart of average UK house prices over the top of any one of these and you’ll see how it looks.
You are very misinformed about foreign exchange intervention, the impact of temporary changes in interest rates, the reasons for the last property crash (which leads me to believe that you were very young at the time) and macro economics in general. Firstly, the BoE (and all the other central banks) have intervened in the foreign exchange officially and unofficially many times since 1992 – so supporting the currency has nothing to do with “policy”. Secondly, the housing market had already started to fall in 1989 as a result of higher interest rates that continued rising. The ERM crisis was in September 1992 so had nothing to do with it. On that day, the Bank raised rates from 10% to 12% and then back down to 9%. To say that this had any negative impact on property prices is plainly idiotic.
You say that none of these factors are around now. Well done! However there is a little more to macro economics than that. If you want to learn about supply-side recessions, read my previous posts (you might also learn that I was advocating that the Bank sell sterling, not support it).
One last thing Hoogstraten: Do try to keep from resorting to insults. They are no substitute for reasoned argument supported by fact, and debase anything of value you might have also said. There are a lot of intelligent people reading this forum and they see right through it and the subsequent attempts to cover it up through “jokes”. I think that you do want to be taken seriously, otherwise you wouldn’t be wasting your time in the forum – you will achieve this by keeping your posts mature. |
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Sound investment?
by zorro
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#1000733
of 3278
14 Nov 2002
10:43 AM |
Si -
Thank you for taking the trouble to analyse my data. Your argument is logical and figures sound. My analysis is the same as yours, that is precisely why I am hedging my bets.
Investment in property in my opinion is no longer valid for anyone who needs to acquire finance by leverage, but it still plays a part in the balanced portfolio of a cash-rich investor, with the proviso that an allocation of such a portfolio would indeed be in cash, say 25%. |
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CPI calculations
by rev.hk
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#1000732
of 3278
14 Nov 2002
10:00 AM |
Dear DPS,
You make an interesing comment about house price inflation in the UK . The RPI (CPI to almost everyone else in the world) exludes the cost of houses and any capital repayments. It only includes mortgage payments since these are an integral part of the average household's expenditure in a month.
So, if you do your house up, the better quality will only be reflected in the house price index if the house is sold to someone with an outstanding mortgage. Otherwise, it has no effect whatsoever.
In any case, the one that the Old Lady watches is the RPIX index which takes out the mortgage component and is less sensitive to changes in the rate of interest.
I hope this what you were after.
rev.hk |
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UK housing
by DPS
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#1000731
of 3278
14 Nov 2002
07:53 AM |
I have read with interest the last page or so on this topic (all personal banter aside). Now maybe I am talking my book having bought in the last year, but one fact seems to go unmentioned in all debate about the actual price rises.
In the US for a fact (not quite sure in the UK) inflation is measured as the increase in prices on like for like goods. So if Ford bring out a new Mondeo with a higher spec and therefore a higher price this is not inflation per se.
Now my point is, that, is the renewal/renovation effect factored into the house price inflation numbers. Because anyone who has tried to get a builder in the last 3 years or cannot find a park beacause there is a skip and three trucks doing a loft conversion next door, will tell you the value of property must have gone up du to the increase in quality (renewal) and capacity (loft conversions) such that when talking about "inflation" you are not comparing apples with apples.
I would appreciate anyone directing me to any data on this betterment factor. |
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Zorro - feel free to take issue with this view of #725
by Si
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#1000730
of 3278
14 Nov 2002
01:10 AM |
Zorro,
That is a fascinating point.
If the free-market value of the properties that you just sold, versus the gross rental, yields 6.7% then it returns comfortably more than double what you can get with a few hundred thousand pounds in a fixed-rate deposit account (I don't work in finance so excuse me if I use this simple benchmark!).
Of course an accountant may take into account material depreciation, maintenance, likely void periods, and some kind of contingency for damage (insurance? what are the costs?). Adding to this the fact that the price a buyer (investor) would pay on the open market would be more than that which you sold them for, ie typically through an estate agent, may be - I dunno - another £5000(1) on a discounted £200k property (I really don't know), and stamp duty paid at 1%(2) of purchase value.
A few pretty crude back-of-envelope calculations (I'm not a property investor I'm afraid, please correct me if necessary):
So, the property that you sold to your tennants for £200,000 giving a gross rent-to-value yield of 6.7%:
cost to buy: £200,000 + £5,000(1) + £2,000(2) = £207,000
rental yield: £200,000 x 6.7% = £13,400/annum
Combined costs of wear-and-tear, void periods, insurance, maybe agency fees (or the cost of your productive time to make money elsewhere, do a bit of overtime, whatever, the division of labour if you will...), total maybe 14%??????????
£13,400 take 14% -> £11,500
£11,500 income out of a £207,000 purchase gives 5.5% yield. Still good.
if you take off 23% tax off the rent (according to 'How to make money from your property' by Fiona Fullerton) (is this technically income tax on income from an investment then?) then this becomes:
£13,400 take 23%, then take 14% -> £8,900
£8,900 net income, giving 4.2% yield.
compared to the 2.4% net yield from a 5year fixed rate savings product, this is competitive still, but I would hazard a guess that it is only just competitive, taking a property investment as significantly higher risk than a building soc. account.
So to continue:
That 1.8% difference (£3700 on a 205k property) is very small compared to the price-volatility of property.
Furthermore, a 25% reduction in rental, by £3000, or about 1%ish after costs taken into consideration, would about halve this yield. I hazard a guess that a 1% yield above a nice safe building society 5 year fixed rate bond would normally not justify the risk? This really is a guess so please enlighten me!
I must qualify the above - I'm numerate, but no accountant or economics whizz, so please take issue with my figures. But as they stand, this suggests that market values where Zorro has properties are about right when viewed as non-leveraged investments taking income off rentals, but with 3 qualifications: property-price volatility is one to two orders of magnitude more significant than rental income as things stand, secondly moderate changes in taxation or rental prices can adjust the yield to the point where it would significantly change the underlying £value compared to rentals, up or down depending on the change. The third is that a 1% hike in available savings rates elsewhere would necessitate either a 25% increase in rental, or a 20% decrease in purchase-cost, to achieve the same profit-advantage over a savings account, and a 1% reduction would do the opposite.
If you are looking for some quantification of triggers for a possible fall, then a fall in rental-yields of a medium size (unemployment = skilled imigrants leaving, also people downsizing their choice of rented accomodation, like I would do) of 10% to 50% depending on the size of crash that you're looking for. Or a percent or two onto interest rates? So just how volatile do we reckon rentals are likely to be? And interest rates? I would suggest that property investment is only for those who can seriously balance the volatility against other investments, and certainly not, according to these figures, for heavily-leveraged buy-to-let.
I have to say that this doesn't suggest to me that houses are overvalued, just that a significant number of buyers may be over-leveraged, so that any deterioration in the economy could be felt particularly harshly in the property market, or gain in the economy could dramatically improve those leveraged investors' wealth. So what IS the economy going to do? [and what do you make of my numbers..... ;-) ] |
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Dull & obtuse
by rev.hk
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#1000729
of 3278
14 Nov 2002
01:05 AM |
H.
Thank you for that kind and deftly worded response to my earlier posting - where you dismiss my assessment of you as drivel (deranged megalomaniac-talk). I don't read this forum much now and have even less interest now that you have arrived.
Let’s quickly turn to your own standards, or lack of them - aside from the total absence of reasoned arguments for a sustained increased in UK property prices and Island Blighty weathering the global debt-deflation storm. It has so far, but the cracks are all there - including the UK's **** record on productivity growth.
Not long ago you were the champion of banks continuing to lend in a falling market - in order to avert an even sharper fall in asset prices. Now you are confirming that banks do act prudently in a falling market. Continuing to lend - or lifeboating as Americans call it – does happen in selected cases, but not for the market as a whole.
These two opposing views - in such close proximity - are surprising given the determination with which you attempted to stick to others a few days ago. This forum has standards and it's a shame you seem - like your namesake - to believe they don't apply to you.
Enjoy the dark rainy winter. It's lovely here today as it will be for the next three months. Sun, 28 degrees with mid-range humidity and clear blue sky. I'm off hiking over the hills and beaches of the big island. What are you doing?
[This message was edited by Monitor_CS on 14 Nov 2002 at 01:22 AM.] |
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