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| The UK housing market: a bubble about to burst? |
Mr X
by Sceptic
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#1000798
of 3278
 15 Nov 2002
11:35 AM |
Yes, I agree with your assessment that now (or soon) is the time for property speculators to sell. By the same reasoning, now is not the time for FTBs to buy unless they really need to and can afford to without taking large risks, and I am not sure that there are so many in that position.
We share many views, however I think that there will be a correction in prices rather than stagnation, as usual, since there are currently a lot of speculators in the market, and FTBs will start to think about risks much more due to the large number of redundancies in well-paid jobs.
It is likely that this will result in more sellers than buyers in the not-too-distant future, and this will lead to declining prices by normal market forces. Markets are cyclical in nature, and the secret to wealth (as you have realised) is to buy low and sell high. |
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Get up to speed Mr X
by Knowledge is Power
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#1000797
of 3278
15 Nov 2002
11:28 AM |
Mr X,
Sorry Mr X, you are at least 12 months out of date with your data:
Taken from the land registry: http://www.landreg.gov.uk/publications/ppr/pprq302.pdf
Average London house price July-Sept 2001 = £216,210
Average London house price July-Sept 2002 = £248.609
10% Deposit = £24.8k, and with a salary of £45k that equates to a mortgage lending multiple of 4.9% (a very high and dangerous lending multiple). This is a monthly repayment of £1326.16 (using your 4% rate), or £15,913 per annum. This is 35% of annual earnings!
Bottom line – A person buying in this position is a fool! |
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Sceptic
by Mr X
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#1000796
of 3278
15 Nov 2002
11:11 AM |
| In response to your query. I do not do property transactions these days [I live off the built up cash] Based on my explantion with the calculator, I would if I had a property to sell for speculation sell now [spring the latest - may be some further marginal gains] Why ? Because I firmly believe that we will have a stagnation equivalent to the low inflation rates we are currently experiencing. Therefore, with similar interest rates being offered on deposits, it is better to convert the stock to liquid funds and thereby reduce any elemnt of risk posed. Now is the time to realise and enjoy !! |
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Housing
by Mr X
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#1000795
of 3278
15 Nov 2002
10:54 AM |
To Knowledge is Power - Average London Price of Housing is £200,000 and salaries of £45,000 not uncommon for young "first time buyer" professionals. Add my arguemnts about inherited deposits etc, shortages, then regretably those on less and have no cash access are pushed out. That is demand and supply. Outside of London the average price is almost half eg £110,000. Take your deposit away 10 % and with £100,000 mortgae divide by 4 is £25,000 pa annum [nearer to your deemed calculation ie my calculation of £45,000 being double the average wage]
Furthermore, 2 people earning [man plus wife or live in couples etc] can take care of the average scenario [e.g £18,000 pa man and £12,000 wife - not uncommon]
Sorry power, you need a bit more knowledge first !! |
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Andy B
by Sceptic
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#1000794
of 3278
15 Nov 2002
10:51 AM |
| Andy B, I thought you were attempting to provide a worthwhile contribution to the debate, but I see that you have reverted to type and started the insults again. |
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Forget averages
by Sceptic
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#1000793
of 3278
15 Nov 2002
10:40 AM |
Mr X, can we assume that you are suggesting that FTBs should still enter the market at this stage?
If you have made money from property dealing over the past 25 years, what has your philosophy been for deciding when to buy and sell? I assume that you have sold property, otherwise you wouldn't have money in the bank as you have stated.
You say:
"Incidentally, it is also noticeable how when "busts" have happened in the past, there was a predominance of small 1 bedroom flats / house etc that were most predominant on the market.In other words, generally first time buyers who had most recently purchased. The middle market buyers stayed put - they did not have to sell."
Perhaps this is why, when a bust occurs, the graph of prices tends to roughly mirror the preceding rise to start with. Perhaps the mistake of some contributors is to assume that everyone is represented by the average. Not so, the average person has not bought in the last few years, and the average person does not need to sell for a bust to occur. |
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The joke's on the jokers
by Andy B
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#1000792
of 3278
15 Nov 2002
10:39 AM |
Mr X - thank you for your last posting.
Rob G/ Si/ Someone named after a drink/ you have dominated the debate - made people laugh - but have failed to answer the question or apply rational economic agruments to the problem.
I suggest you start on page one of a first year degree book in economics and find a job on the stage.
I still believe you have no answer to my posting of #764! |
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Nice one!
by Knowledge is Power
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#1000791
of 3278
15 Nov 2002
10:27 AM |
Mr X,
good to see you using a wage near double the average wage to illustrate your point.
Very ironic! |
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Housing
by Mr X
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#1000790
of 3278
15 Nov 2002
10:20 AM |
To Extra Dry - Get your calculator out and check the following scenarios.
Year 1995 House Cost £100,000 and 10 % deposit leaves £90,000 mortgage. Wage £33,500 pa. Amount can borrow at 9 % is 2.75 earnings [ie £92,125] Repayments are £763 per month or £9,156 pa or 27% of annual earnings.
Year 2000 Same House Cost £200,000 and 10 % deposit leaves £180,000 mortgage. Wage now £45,000 [just over 4 % pa compound from the £33,500 1995 wage level] Amount can borrow is 4.00 earnings[ie £180,000]Repayments are £1,060 per month or £12,720 pa or 28 % of annual earnings.
Conclusion, earnings to monthly repayment affordability the same in 2002 as 1995. What we have seen is a correction over the last few years as interest have fallen [not withstanding lack of supply, etc]. As we are at the same affordabilty levels now then in 1995, it would be difficult to see massive drops in prices, unless we have massive rises in interest rates [very unlikely today than 1995 and certainly posing far less risk] and unemployment rises. Therefore, a stagnation is now likely to happen as peoples earnings rise very slowly these days, and affordabilty levels will serve as a break to further huge upsurges.
Furthermore, that same individual who with his £90,000 mortgage in 1995, today after 7 years would owe approx £74,600 on a house currently worth £200,000 i.e. in debt by 37.3 % of its value. Prices would have to drop one huge amount for him to worry.
As I have said all along, the First Time buyer is the one most at risk if he bought within the last year, and because his earnings in a low inflationary economy is likely to remain low, then his affordabilty ratio is unlikely to drastically drop.
As I have also said, people do not have to sell especially those who in this example bought in 1995. His £90,000 mortgage cost today from (9% in 1995 to 5% in 2002)is £532 per month or £6,384 pa representing now 14 % of his earnings. For this individual alone, there would have to be one hell of a drop in prices for him to worry or massive hikes in interest rates to bring him up to the 1995 levels. He could even be made redundant and afterwards get a lower paid job by 10 % pa [for you deflationists] and STILL only have an affordabilty index of approx 16 % [£45,000 pa down 10 % = £40,000 approx. Affordabilty £6,384 / £40,000 = 16 %] Incidentally, it is also noticeable how when "busts" have happened in the past, there was a predominance of small 1 bedroom flats / house etc that were most predominant on the market.In other words, generally first time buyers who had most recently purchased. The middle market buyers stayed put - they did not have to sell.
For this one example, and for the reasons already put to you, I envisage a stagnation now as the correction has now come to an end. Once again Stagnation Yes but Bust No.
Now Extra Dry could YOU please explain and support in simple mathematical terms your point of view [and cut out the economic gobbledy gook - we have enough conflicting views from economic "experts" in the press, forums etc] |
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BoE biass
by foreigner
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#1000789
of 3278
15 Nov 2002
10:11 AM |
| If inflation rises above 2.5% will this cause the BoE to change their stance on rates? (I know I am betraying my continental background here.) And what impact will three more years Labour overspending have on inflation rates (no, I do not vote in the UK)? I'm simply trying to get the issues clarified before I make a decision how and where to invest my money. Each side in this discussion seems at least to agree on the importance of the base-rate for the development of the housing market. |
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See posting #764 - ignore the part-time economists
by Andy B
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#1000786
of 3278
15 Nov 2002
09:49 AM |
Rob G - you are quick to dismiss agruments based on economic facts. I suggest you read again #764. It contains economic facts based on actual econometric analysis.
Simple statements such as - buyer confidence - are obvious but need to be applied to the economic fundamentals:
Fact:
1. The average mortgage is is only 2.4 times incomes - in real terms.
2. The over supply of houses - ie the number of surplus housing to households has fallen by 2 thirds in the last ten years!
3. If you strip out lower cost housing (typical rental market properties) - expensive housing only rose in price by 5% in the last year.
4. The rental market is only a small part of the total market.
5. In real terms - house prices are still lower to today compare to average earnings than in the late 1980s.
6. There has not been a lost of confidence in house prices without some major movement in interest rates.
7. Low inflation tilts the burden burden of mortgage payments away from the front end of a households life cylce. This is the point I keep saying you have missed!
8. Statistical evidence points to a shift in the structural economic factors in the housing market - ie using utility theory to explain this - the utility curve has shifted towards house ownership - this pushes up the demand curve and leads to a long term (though never permanment) increase in real house prices (measured in terms of real wages).
9. When the Halifax states house prices have risen 30% - they are infact saying the average price paid is 30% more - they find it hard to strip out house size impacts.
IN ROB G TERMS - The fact is - if you do not own a home - you are now poorer than a year ago. Most people do own homes - most people are alright Jack!
The dot.com bubble popped because the dot.coms went bust - they ran out of cash! Only a change in cash flows - such as an increase in interest rates will crash the whole market.
Andy B |
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Back to the topic...
by Extradry Martini
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#1000785
of 3278
15 Nov 2002
09:38 AM |
Going back to the FT statement and question at the top of this page, I think that the very worst thing the BoE could do right now is to raise rates to prick the real estate bubble.
The Bank should be worrying about high and rising corporate and household debt levels in the face of falling investment and confidence. You do not increase confidence or investment by tightening monetary policy in these conditions. The BoE needs to keep money as loose as possible in the credit crunch in order that lending rates do not go up. This will enable companies to destroy capacity and repay debt more easily, and therefore help keep the recessionary forces at bay.
Naturally easier monetary conditions will mean that the property bubble will go on for longer and household debt will rise as a result, as all those idiots who believe that that the property market will go up forever take out more “equity”. (Mark my words - in a few years time the term “equity” when applied to houses will sound like a sick joke). The way the Bank could counteract this is by introducing a reserve requirement to make high loan-to-value lending more expensive and give a collateral cushion to the banking system.
Like this, the Bank could stem the property bubble while improving the ability of companies and households to repay debt, thereby giving stability to the banking system and easing the credit crunch etc.
After all, the level of house price is not the business of the Bank of England, but the level of collateral in the banking system is. |
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We need reasoned argument - not glib statements...
by Extradry Martini
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#1000782
of 3278
15 Nov 2002
08:50 AM |
Mr. X
You say that you expect the UK real estate market to “stagnate” at these levels or higher without going down. Please explain how you see this happening when it has never happened before in the history of recorded price change.
Jack Straw
I have proved every argument and fact, bar none, that you have produced wrong. (I’d love to see you produce your “Asset Liquidity Theory” in person to a group – any group – of investment professionals, you wouldn’t be heard over the laughing). You have not addressed me or my arguments directly in this forum even once – the best you have done is the breathtakingly unimaginative “shaken not stirred”. When are you going to say something of substance? |
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Housing
by Mr X
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#1000781
of 3278
15 Nov 2002
08:13 AM |
| Si - Perhaps your explanation as to why my arguements are illogical may help. They are straightforward and practical and have all served me well. The revs etc all are economic talk and largely at odds with a lot of the economists conclusions that we will have a stagnation [my view] and possibly a very small drop [not my view]as you read in the press. |
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not fully decided but leaning...
by Si
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#1000780
of 3278
15 Nov 2002
03:00 AM |
rev.hk:
hear, hear.
Mr. X:
the problem I have with your (and to an extent Jack's) arguments is that I have to think twice, three times and more about your arguments. And I still don't find they logically add up. I feel that if in a room with people on both sides of the argument I would listen more than contribute, but I find the arguments from yourselves intellectually incomplete. If rev.hk, extradry etc. are wrong, then they are doing a very good job at concealing it. You, I'm afraid, are not. Sorry. |
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