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| The UK housing market: a bubble about to burst? |
The London market
by Lulu the Cat
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#1000816
of 3278
 15 Nov 2002
12:42 PM |
Hi Mr X and others,
Just to clarify, the average London salary is £26k and not £45k!
Also Mr X you make a point about the 'good areas' rising faster than the 'less desirable ones'. In fact it is the downmarket neighbourhoods like Stratford, and Dagenham (no offence intended to anyone who lives there) which are now experiencing enormous growth since the established areas are out of reach to many. The established areas are currently either experiencing no growth atall, or in some cases, such as Kensington & Chelsea, and the City of London, have already gone into reverse.
Anyone seeking clarity or further detail on this issue, go to Hometrack and type in a postcode to see the recent trends in an area.
Lu |
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Mr X - how did you work out £572 a month?
by DJW
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#1000815
of 3278
15 Nov 2002
12:41 PM |
| Can you explain where you got this figure from, and what assumptions you made (eg interest rate over the period of the loan, length of the loan etc, amount borrowed). I don't understand how you arrived at this figure. |
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Crash without hikes
by rev.hk
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#1000814
of 3278
15 Nov 2002
12:40 PM |
Andy B demands examples of housing market crashes without higher interest rates. Here in Asia there are three recent examples -: Japan, Singapore & Hong Kong. I choose these because they each have a different exchange rate regime and different options for killing the pain. Japan is mostly a float and can print money. Singapore uses it currency actively to target inflation and can print money. Hong Kong is a currency board and cannot print unless is runs a balance of payments surplus. All three have seen property prices collapse in recent years. All three suffered huge price drops without rate hikes. All have interest rates at almost zero and prices are still going down.
There are plenty of others from around the world, but I think three examples should suffice.
It is interesting to see everyone trying to outdo each other with figures that demonstrate everything is tickety-boo in the UK housing market. What the examples fail to take into account is the fact that the discount rate is at a historical low.
Mortgages might be affordable at the moment if you are assuming the only thing that matters is the interest rate today. But only a naive fool would do that - no insult intended. It's the interest rate that you will have to pay over the lifetime of the contract that you should be using in the calculation.
If you believe that everything in the world economy is fine then rates will go up and you must factor that in. If the busters are right, then the supply of credit will eventually diminish as GDP growth slows and goes into reverse. Your conclusions might look very different if you use the correct assumptions.
As for whether the Bank of England should use higher interest rates to burst the bubble, I doubt they would even entertain the idea. The BOE is actually in a terrible position - much like Al Greenspan was in 1996/97. If it lowers interest rates to help the corporate sector, it is reinforcing the belief amongst home owners that they have a put option every time there is a wobble. If it raises rates to snuff out the housing bubble, it will kill the corporates - many of whom are awash with debt left over from the dot.con madness. Policy makers in the UK are getting very, very uneasy as they should be. The end game could be another 50% up on house prices followed by a terrible reckoning for those sucked at the end.
Whether or not you think prices are affordable doesn't really matter. You need to follow the big picture and the faltering fortunes of the dissaving US consumer. That's where the real threat comes from. If Big Al falls asleep in front of the TV and stops visiting Walmart we've all got big, big problems. |
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General Comment
by SL
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#1000813
of 3278
15 Nov 2002
12:36 PM |
Throughout the history of this forum, certain contributors, EDM and Rev HK amongst them, have spent a great deal of time presenting a reasoned argument supporting their view that the housing market will lose up to 70% of its value over the next couple of years. Other contributors have challenged this view and have presented their own arguments. It is sad that almost all of those challenging the views of Rev and EDM have resorted to insults and aggressive tactics. I would love to see a clearly presented argument that competently presents an alternative scenario - preferably an opposite one.
I'm not impressed by points scoring - just informed debate. Anyone up to it? |
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Mr.X re:#783
by Si
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#1000812
of 3278
15 Nov 2002
12:34 PM |
Mr.X.
When you say that your arguments have served you well, does this mean as a private investor dealing with the current market and maybe over a few decades in the past? The thing is that if this was the case (and I'm not saying that it is) then your view would be limited, whereas it strikes me that rev.hk's (etc) views are based on analysis of scenarios in text-books & journals, beyond their immediate experiences geographically and chronologically. Since we are in unusual times then this latter analysis would be more valid. I'm quite willing to be corrected. |
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I'm STILL with the ExtraDry camp
by DJW
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#1000811
of 3278
15 Nov 2002
12:34 PM |
I still find the comments from the side of ExtraDry / Engineer the most well argued.
The fact that the non bust arguers (Hoogstraten and crowd) do not present reasoned arguments devalues their case.
Anyway - here is another link to read from Howard Davies -"Mortgage borrowers 'playing with fire' "
http://newsvote.bbc.co.uk/1/hi/business/2477389.stm
In this forum we are talking about the housing market as a whole not just individuals.
The housing market is a trend/ average. There will always people who do better or worse than the trend, but this doesn't make the trend incorrect.
I'm a firm believer that there will be a 40% drop (after inflation) ON AVERAGE in the housing market. Some will lose more, some will lose less, some may still even win. The bust will be in proportion to the boom - AS IN PREVIOUS BOOM BUST CYCLES. (See Nationwides own figures) |
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Knowledge is power
by Mr X
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#1000810
of 3278
15 Nov 2002
12:30 PM |
Please - do get your calculator out again !! Mortgage of £96,729 is £572 per month or £6,864 pa or an affordability ratio of 23 % [£6,884 / £30,000] Re : your comment - a 10 % deposit being a tall order. Lets re-work. £107,476 mortgage [full 100 %] would be £635 per month or £7,620 pa or 25 % affordabilty ratio.
Compare to the examples of 1995 at 9 % worked earlier. The ratio is still lower.
Low interest rates have now done the correction - just acknowledge that we are now to have a stagnation. |
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Zorro 1000737 and the IHT conundrum
by Shareholder
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#1000809
of 3278
15 Nov 2002
12:27 PM |
Zorro it is all very well making money,the problem is keeping it. Otherwise all your efforts go to help Mr Brown in his vote buying spree from the country's layabouts.
I tried your web address and I think it is incorrect!!
The problem with trusts is that they have a downside in terms of income taxation and trust charges and limitations etc.
The problem with companies is again capital tax and they are still classed as a business making or holding investments.
Believe me I took advice and it was wrong, the advisors were in it for what they could get. I had a battle with the revenue and they quoted previous case law and law lords appeals, big powerful stuff.
40% of all value over the £240k or so allowance is a lot of peoples blood,sweat and hard work. The problem is it works both ways, on what you inherit and on what you pass on to your heirs. If you were a sole beneficiary then £240k can be a lot of money, if you have several brothers and sisters etc it can be far less and they still want their 40%. There are ways of paying in instalments on property etc. but you find all your hard work going to the government.
I would be very interested in keeping the discussion going and in the correct web address.
Also any other comments from property owners etc.
The IHT threshold has not risen by very much over the years and is now way out of date considering peoples home values. The people getting caught by the tax are not the wealthy who can afford to give away millions and still have enough to live on (eg. Queen Mum) but hard working working class families who have struggeled to pay motgages for most of their lives and then have their assetts used to pay for care in old age and then worry about IHT on the rest of it.
Then taking my RAILTRACK shares was the last straw!!!! |
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Lets address the real concern of rising prices
by Knowledge is Power
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#1000808
of 3278
15 Nov 2002
12:25 PM |
Mr X,
Rather that banter on with this argument, let me try to explain why I think house prices are very high & out of kilter with society at large. In your recent post, you add a partners wage to the equation, to illustrate a point. For £15k, lets assume it’s part time.
This ties in the unemployment figures. Yes they are at a 27 year low (or something like that). But, there are many part time workers in this figure, a figure much higher than in the past. Now I’d advocate that the reason for this is because people are increasingly struggling to make ends meat. A second salary is needed to cover monthly costs, go on holiday, buy a house etc. However taking the traditional home/family life style, this doesn’t gel.
Traditionally, the Male would work full time, and the female would stay at home and look after the kids. This is not intended to be patronising or sexist. It’s a fact of life, and there is a convincing argument to be made that 1) looking after kids is a full time job, 2) a mother is far better in this role, particularly with small children, 3) in our still adjusting culture, a man usually earns more than a woman. I don’t want to argue on this, as this is outside the scope of this forum. So please humour me with regard to this matter so I may best illustrate my point.
The fact is, that in our current climate, this traditional home life does not work. Only if the man earns a really big wage is it possible for a woman to remain at home in this traditional role. So, there are a lot of part time workers out there, damaging the future stability of family life, because they need to make ends meat. Sadly, if this couple do have children, they often need a nanny or child minder to take on some of the responsibility of the mother figure. This comes at a cost, and this part time second income is often negated through child minding. Thus the only real value of a second income is to meet the mortgage calculations of home ownership. Whilst arguably, home/family life suffers. I've several friends in this exact position, struggling to get by, a very sorry state of affairs if you ask me.
The prime reason for this scenario is in my humble opinion due to rising house prices, affordability is stretched & it is having a fundamental impact on our culture and make up of society. This is why I want to see house prices fall to more modest level. To preserve this for the future, to bring up children in a stable home environment, and reduce the constant worry and stress of generating these increasingly high home ownership costs.
If any of this offends, I appologies, this is my opinion and in no way is aimed to upset. |
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Tim
by Mr X
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#1000807
of 3278
15 Nov 2002
12:15 PM |
Yes it is true that good areas have gone up far more than the less desirable areas. But we are talking in general the average area taking into account the high priced ones, and no doubt the lower than average areas too.
As for the doom mongers amongst us, I still fail to see any real mathematical analysis to say why we are heading for a bust. This is what I am waiting for. |
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?
by Jack Straw
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#1000806
of 3278
15 Nov 2002
12:10 PM |
Valid points and discussion do not appear to work. Although certain individuals have changed their thinking, others are still clinging to the misguided belief of 70% house price falls.
I would challenge you to place a wager on your theory - however I'm sure you are
"shaking like a french soldier"
matt goening - simpsons
when it comes to committing to tangibles. |
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Mr X thank you for illustrating the point so clearly
by Knowledge is Power
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#1000805
of 3278
15 Nov 2002
12:05 PM |
Mr X,
To quote you from an earlier post:
“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]”
2.5 x (£18,000 + £12,000) = £75,000
According to the Land Registry, the cheapest average house price would buy you an old terrace somewhere in England/Wales for £107,477.
£107,477 – (10% deposit) = £96,729
Incidentally £10k for a couple on this salary is a pretty tall order!
£96,729 / £30,000 = a lending multiple of 3.2%
Summary, with these wages you quote, this couple would have to stretch themselves even to afford the absolute cheapest average property in England & Wales.
Thank you for illustrating using your own figures that house price affordability is severely stretched! |
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Knowledge is Power
by Mr X
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#1000804
of 3278
15 Nov 2002
12:03 PM |
Of course a person buying at a factor of 4.9 in London[assuming he can get a mortgage] would be foolish. I have always said along that the first time buyer is at risk. The fact is that your average value of £248K further adds credence to the argument that we will have a stagnation. We have reached a limit. Note also that there are many second time buyers too who have sold [at a profit] and placed large deposits down, so do not necessariyl have 90 % mortgages.Also, we talked about a single professional -add to that a live in lover / wife / etc with a further salary [assume a conservative £15,000 pa in London] and the affordability ratio drops back down again to 27 % [£15,912 / £45,000 + £15,000 = £60,000 = 27 %]
Outside of London of course, these figures are less pronounced.
The bottom line is that the FTB's can and have taken on these mortgages debts and can meet the payments. Again, the fly in the ointment would be higher interest rates [unlikely] and massive unemployment.
That's the dynamics of the housing market - there have been many times I have come across several would be buyers chasing one property - but its the way of the world that he who has money gets the property. |
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To Mr. X
by Tim
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#1000802
of 3278
15 Nov 2002
11:46 AM |
Mr. X good analogy you posted as it is refreshing to see arguments posted using actual figures to demonstrate real life scenarios.
One issue I have with your illustration:
You stated that the ave salary of a young professional is £45k. This would have to be in London as I doubt this is achievable elsewhere. If so then this would only buy a very small flat, probably above commercial premisis in a not so desirable location like Crouch End (no disrespect to the area intended). Now would a young professional be looking to buy this property...probably not. I think you would be looking at at least £250 - £300k which would stretch him and his partner considerably more.
Also the £100k house in 1995 in a good area would now be worth around £300k not £200k. Cases in point:
1. 4 bed house in Clapham (Altenberg Gdns) renovated and sold for £245k in 1995 now worth £650 to £700k,
2. 3 bed house off Battersea Rise bought for £175k in 1996 now worth £550k.
These are actual cases that friends have experienced.
I think your figures are a good start but would reflect a much riskier situation if applied to actual market figures above. |
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Dangerous Complacency
by Extradry Martini
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#1000799
of 3278
15 Nov 2002
11:38 AM |
Mr X,
Credit where credit is due (so to speak): your maths is impeccable. You have supported an argument with facts, and that is something to be applauded in the forum recently.
But don’t you think it’s a little bit short sighted just to look at current wages against current mortgage repayment levels? What do you think happens to the average wage in a recession? How do you think the ability to repay a debt twice the size is affected by a lack of inflation? Where do you think all this capital comes from in order to finance house prices at twice what they were? What happens if that capital source dries up because of problems elsewhere in the economy? Why do you think that the repricing of credit risk will not affect the mortgage market? What do the buy-to-letters (representing 10% of all new purchases!) do when rental yields are so far below mortgage payments that they cannot take any more? How can the householder replace the capital he has destroyed when he “released equity” to buy consumer goods? Why, if property as an asset class is fairly valued, do you think that rent levels have come down so much?
Sorry, Mr. X, but I have to say you’ve built your entire opinion on a tiny part of the picture. Your maths works, but it is simplistic.
Incidentally, to answer an earlier question (I think of Andy B), house prices came down (as nearly every other price did) in the 1930’s when there were low interest rates. According to the Land Registry, average prices came down 14.2% in the period between 1931-1934. Interest rates were at 3% - lower than they are now. Naturally, in those days people were a little more rational when it came to house prices and didn’t think that a rising market was right (despite their 1929 irrationality in the stock market), and that is why prices moved broadly with inflation (or deflation in that case). The period is significant, as it is the last time the West saw a supply-side recession. There simply hasn’t been another one until now, and that has thrown the average person off in his understanding of the risks involved. Just because there is no living memory of something does not mean it cannot happen. After all, empirically the world is flat and sun revolves around it.
A couple more things: There are no conflicting economic views in this forum. The economic view is solidly on the side of a bust.
Secondly, and I feel as though this is the thousandth time I’ve said this in this forum, you don’t need a majority of house owners to sell for the market to go down. Most people will not sell, but then again most people did not buy on the way up. Supply and demand are not caused solely by the number of house being built and relative “affordability” or how many people are renting – the forces currently at work in the economy (and last present in the 1930’s) are far deeper and far more powerful than that. |
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