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| The UK housing market: a bubble about to burst? |
will rents really rocket
by Si
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#1001123
of 3278
 27 Nov 2002
04:35 PM |
Zorro:
Interesting point raised about rentals rising in the event of reposession, etc.
I genuinely wonder what happened in the house-price correction of 89-93, to rentals.
I can see many factors, including what would happen to tennants in a BTL flat that was 'reposessed' from the landlord. Also, if job-losses were part of the same phenomenon causing a property-price correction, then perhaps there would be less demand in previous commercial rental hotspots. New uni' students would be more likely to go to a home-town university if Dad becomes less certain about income and his own house-value, therefore having less money to subsidise them while they study. Less corporate letting activity in a subdued economy would also release more properties to the normal market. Renting professionals may choose to share thereby reducing the demand for properties. Many more home-owners, facing more challenging repayment conditions, may offer rooms for rent, increasing the supply.
I think that supply-demand could lead to some potential for rental increases, but there may be many factors that could equally (and contentiously) reverse this. It's hard to tell. Figures from 89-93 would be very interesting. |
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And will controlled rents make a comeback?
by zorro
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#1001122
of 3278
27 Nov 2002
04:34 PM |
The great inquisitor
You are right that some BTL landlords are selling stuff off (me for one). As there is no profit margin left in many parts of the country, these sales are mostly now to FTB. The culmination of this process will be a diminished pool of rental property hence rents will go up. Which it turn would presumably make BTL an attractive investment again? Hence prices go up again etc.
However, what would I do if I were Tony Blair (perish the thought)? There is a constant stream of opinion in the media about the unaffordability of accommodation particularly in London for essential workers. A Labour government's solution in the past was to freeze rents (Fair Rents Act). Could this solution be brought back?
What strikes me about this present goernment is how, for a time, they allow a 'snouts in the trough' (if I say so myself...) option, eg to utility companies, to those greedy souls who originally had bought the Railtrack shares, and now to the buy-to-let landlords. The the regulators move in.
It also strikes me that on most issues, the national press sings from the same hymn book, based on government briefings.
On the topic of BTL, the hymnbook contains two hymns: 1. how it is a smart move to acquire a little BTL property in lieu of non existing pensions (ie: to encourage as many punters as possible to jump on the BTL bandwagon) and 2. what blood-thirsty lot those landlords are and how they are getting rich at others' expense (a rather strange stance for capitalist press to take, but clearly meant to soften the public opinion for the inevitable Night of the Long Knives to come).
It has been remarked on this forum a number of times that new housing starts are at the lowest for some decades, and the government certainly has no plans to subsidise public housing by any means other than by obliging developers to set a percentage of their speculative developments aside for public housing. I foresee in due course this stance extending to all private landlords by some form of legislation. Perhaps even in this spring's budget? |
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the dynamics could change - i.e. less demand more supply = lower prices?
by Knowledge is Power
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#1001121
of 3278
27 Nov 2002
04:25 PM |
Jeff Morgan,
The point I was trying to make is that if there is a massive increase on the number of flats on the market, surely the demand/supply argument will change. (anecdotal evidence on the S/E – London market).
If my anecdotal perceptions are serving me correctly, demand is reducing (i.e. more FTB priced out of the market, less investors as capital gains have reduced, and people in general are waiting to see what will happen). At the same time, supply is increasing (i.e. private landlords are struggling to find tenants and are/could be selling up to realise their substantial capital gains).
Surely if demand is falling and supply is increasing, this will lead to;
1) market stagnation (which is where we are at in the S/E – anecdotal evidence in the main part here).
2) Sellers will be forced to reduce their sale price to encourage the sale.
3) leading to a possible snowball effect hitting the market? (boom then bust?)
If you take the point that the housing market is a system, a dip in the price of flats (in the S/E), coupled with the fall in premier homes in London must have an overall impact on the (S/E – London) market. If indeed it does, then can we have a reverse ripple effect?
Newton’s Laws of mechanics & all that (every action has an equal and opposite reaction?)
Care to comment on this Engineer? |
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FTB - proceed with caution
by zorro
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#1001120
of 3278
27 Nov 2002
04:07 PM |
Engineer
I did not mean to give an impression that I think that the time is right for FTB to buy, particularly in the SE.
What I meant was in the context of two factors: 1. that people have to live somewhere, whether buying or renting and 2. that if the market crashes, rents will go up.
Notwithstanding the fact that with increased unemployment individuals' ability to service debt will be reduced. However, pragmatically, with rents rising as well - due to a shrinking of BTL stocks and more people weathering the storm by renting rather than buying - the redundant private tenants will be had over the barrel by private landlords and evicted if they cannot pay their rents. However, if prior to the credit crunch they chanced becoming FTB and have bought a property big enough to sublet eg a room, that tax-free income could be enough to tidy them over the times of greatest squeeze. The worst that happens is that you would be repossessed, but would the banks in fact want to call in the debts in view of mass defaults? I would be very interested to know what happened eg in Japan with regard to residential repossessions. Any data, anyone? To sum up, I have not been advocating FTB as a smart move to get rick quickly, but merely as a way of providing a roof over one/s head with a degree of control. However, this would seriously reduce mobility. |
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BTL first sellers
by The Grand Inquisitor
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#1001119
of 3278
27 Nov 2002
03:47 PM |
Highly leveraged BTLs who were factoring capital gains into their ability to service debt on a property/group which then do not materialise will probably be the first to feel the pinch.
Psychologically their attachment to property is as an investment vehicle, they may be prepared to stomach some losses for a certain amount of time. If they have a portfolio covering existing expenses/acquired over time and/or have already realised gains may be able to cover these. If they do not they may be able to to meet payments from other sources.
These may then be groups may then be some of the first to sell in a peaking market.
I too have noticed an increase in advertised for let. |
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Can't trust one indicator
by Jeff Morgan
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#1001118
of 3278
27 Nov 2002
03:42 PM |
| KIP, having lots of flats on the market may be an indicator of stgnation but there has been (and is) a lot of building and now there's a s**tload of apartments coming on the market, some with only the developer as owner. (Poor developer). |
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Engineer - I'm with you on that one!
by Knowledge is Power
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#1001117
of 3278
27 Nov 2002
03:25 PM |
Engineer,
I agree, the market is not right for FTB in the S/E (well certainly the Surrey/Hampshire/Berkshire area). Looking at Home Tracks data, the market has been stagnent for some time.
Incidentally, It seems like a)there's loads of properties to rent, & b)there are lots of flats on the market. I'd of thought that the first move in a falling/stagnent market would be a mass exodus of BTL sellers. Perhaps the market behaviour I am observing is an indicator of this? |
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Household balance sheets lending growth
by The Grand Inquisitor
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#1001116
of 3278
27 Nov 2002
03:21 PM |
Some interesting numbers and charts from the BOE for discussion.
November 2002 Inflation Report |
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Topic and Debate
by Jeff Morgan
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#1001115
of 3278
27 Nov 2002
03:19 PM |
Engineer #1114, happy to concur in outline with the pints you made, particularly about equity withdrawl which, as I have written previously, makes me very uneasy.
Now for the pedantic bit. You are correct if you state that the refusal to participate in selling is irrelevant to the topic, because those who sell will create the real price transactions, as opposed to the unreal valuations. But a significant minority - perhaps a majority - of the postings have argued in relation to the behaviour of individuals. Some postings have even shown a certain amount of schadenfreude about a price crash. My point is not irrelevant to such postings, but is simply a corrective to those who might seek to get some emotional satisfaction from a supposed comedown of people who own expensively-valued houses, BTL investors and other two-home owners. Some of those owners might be affected by low prices but most will not.
[Came the revolution, it was the revolutionaries who lost out and Stalin the bureaucrat won. It is ever thus] |
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Non-sellers, feedback etc
by Engineer
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#1001114
of 3278
27 Nov 2002
02:52 PM |
Jeff, the statement 'but I won't sell and there will be plenty like me, so the market will remain stable' is perhaps not irrelevant to the individuals concerned, but it is not correct to say that such 'non-sellers' will prevent a real downturn in market prices. Hence it is irrelevant to this debate.
To see this, it is simply necessary to look at the statistics provided by Grand Inquisitor (who has been raising some interesting points) in post #1103. In the years when past 'busts' occurred, you will notice that there was a sharp drop in the number of property transactions compared with the preceding boom. But real prices still fell. I guess this confirms that the market dries up to some extent during a bust, as there will be less buyers and probably less voluntary sellers when prices are declining.
Probably very few people will sell their properties in well-established neighbourhoods during a bust, but any that do wish to for whatever reason will find it difficult to achieve the current 'valuations', as buyers will no longer be willing (or perhaps able?) to pay those prices if the general market trend is down.
Zorro has provided a reasonably well-balanced analysis in post #1105, and his point about the pyramid effect of equity withdrawal being used to fund deposits on new properties should be taken quite seriously. This is a good example of a positive feedback loop - i.e. the higher prices go, the more people further up the ladder can withdraw 'equity' to feed into the lower rungs of the ladder, which increases competition at the lower levels pushing prices all the way up the ladder higher than they would otherwise have been, thus providing even more 'equity' at the top etc. I wonder how many buy-to-let investors have been making use of this? To me it looks rather like an attempt at building a perpetual motion machine - it might work for a while, but it won't keep on going indefinitely! This type of positive feedback is what makes the markets unstable, and is why I am firmly convinced that a significant correction will occur when a limit is reached and a downturn begins.
I will take issue with Zorro when he suggests that investors should no longer buy, but FTBs should still do so. If the timing is bad for investors, then it is probably bad for FTBs too! Most FTBs are probably much less capable of hedging their risks than investors, and are more likely to be forced sellers in a downturn than all but the most speculative of investors. Looking at the market logically, now does not appear a good time to buy (certainly in London and the SE, where I am located). In my opinion, excessive increases have pushed up the risks to levels that are simply not justifiable any more based on the expected medium-term returns. |
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Extra Dry - You raise some interesting points
by Andy B
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#1001113
of 3278
27 Nov 2002
01:52 PM |
Extra Dry,
You have raised some interesting points about the western global econonies - ie the risk of a credit crunch/major recession.
I feel few can argue that if we see a sharp rise in unemployment then we should expect house prices to fall. This issue cuts across the issues I have been debating about structural factors specific to the UK housing market. In some ways we are not infact in the same debate, since your concerns are much more general marco-economic rather than specific to the UK Housing Market.
But it is a fair point to make - when you are thinking of making a major step like buying your first home - should you take a risk of buying at a 'full price' if there is a a great risk of being unemployed? This must be a question to ask whatever your view of the hosuing market is.
You have specifically linked at times the spreads on corporate debt to the risk that mortgage lenders can not sustain the present low levels of interest offers when the debt they use to fund this is increasing in cost. This argument is valid and logically. Note:Abbey being downgraded by S&P - this should feed straight into the bond market - though usually the downgrades lag the bond market yields as the market makers have already priced in such events. (ie S&P etc are often following the 'market's' pricing and its risk assessment).
But it is also interesting to note that Banks such as the Abbey have come unstuck due to the wholesale side rather than mortgage and personal lending - infact those that have focussed on the household market have stronger balance sheets than those that have focussed on corporate lending. Their range of products also attracts household deposits and 'in credit' current accounts - which are a useful form of funding. (I have worked on the financial side of such banking in the past)
I am not convinced that the bond yields on banks in the UK domestic market will rise to impact directly enough on mortgage rates - to 'Bust' the market.
You have raised the idea of reserve requirements to curtail the lending. Good regulation of the banking system is a must and so I understanding your thinking here. However, given the main issue for UK banks is corporate debt failure rather than private debt default I suspect this is a good idea which in practice will not hit the right parts of the economy - today.
However, you would like to see interests rates fall, which will aid the corporate borrower - but I find it hard to understand how 'reserve' requirements will work in the banking system without further putting pressure on the corporate borrower. Leading to greater corporate failure and higher corporate debt spreads. I do not see how you can target reserve requirements to dampen say the domestic lending but leave the wholesale market untouched.
I am not saying you are not highlighting a major issue - but I am not convinced by your solutions.
One of the reasons for the high level of corporate debt is the lack of equity funds. Many companies have failed to get reasonable levels of equity funding due to the way the major stock markets have operated. The lack of liquity through the stock markets led to increased debt issues and balance sheets with higher gearing. To some extent I think we are starting to pay the price for this issue and I would be interested in your views on this - though I realise it is stepping outside the forum brief.
In terms of your views on poor accounting - I can not agree more - when it comes to some of the Japanese and Asian banks. This is down to poor regulation - but it is still a little harsh on the UK banks - since they were some of the few banks to make reasonable right offs in the last down turn. The joke here being we are still waiting for Japanese banks to right off there 1980's bad debts!
I suspect the BOE are working hard to to maintain stability. You can see this through their publications and speaches of individuals. Trying to dampen down say the housing market without having to raise rates etc. I do not think the UK is close to deflation - but our fate is not always in our hands.
I was very surprised at the actions of ECB who seem not to be following the US Fed in their interest rate policy. This to me is the great risk area for the UK and the western world. In the UK I expect the Government to weaken fiscal policy (through borrowing) and the BOE to allow monetary policy not to be tightened (ie no short term upward rate raise). Further rate cuts not been seen due to higher state debt pressures and government spending.
This is all we can do to keep things balanced here?
Regards,
Andy B. |
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Explaining the throwaway and withdrawal
by Jeff Morgan
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#1001112
of 3278
27 Nov 2002
01:27 PM |
Acknowledgements to extradry, engineer and grand inquisitor:
Extra dry, my remark about credit card debt was one of those throwaways that occasionally plague me when I am typing.
I wasn't thinking of doing mortgages on credit cards (it's a wonderfully surrealistic thought though isn't it!) - I was thinking more of people escaping the bind on spending by increasing their credit card use, because of the 'I want it now' effect.
If that happened, the 'credit crunch' would presumably be even nastier.
By the bye, if dear Gordon decides to borrow more to fund the government's advertised spending plans, that would presumably put upward pressure on long-term interest rates (and on short-term ones too?) which would have even more of the bad effect you mentioned in your posting.
To Engineer #1101, the statement 'but I won't sell and there will be plenty like me, so the market will remain stable' is not, in my view, irrelevant, because the ho0using market is only the stock available to deal. If people effectively withdraw their property then the market changes. I can't see that as irrelevant.
It's interesting to see the figures for house transactions in 2001 (posting #1103 by the Grand Inquisitor). There were just under 1.5 million. I don't know what the total stock in the UK is but a long and stringy calculation I made last night got me to something like 18 Million, so on that basis about 8% of the market was traded in 2001 (some houses may have been traded more than once). That means 92% was not traded, at a time of 'frenetic activity'!
So the 'boom' is based on the price deals of 8% projected to the preceived value of the other 92%. Which just goes to show how peculiar the housing market is. [I don't know what proportion of issued equity was traded in FY 1999-2000 but I bet it was more than 8%] |
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Fed funds vs Mortgage rates
by rsl
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#1001111
of 3278
27 Nov 2002
01:23 PM |
btw, fed funds in the US are 1.25% but mortgage rates are generally 25 year fixed rates with the option to re-finance if the 25 year rate comes down. They are currently around 6% if my memory serves correctly.
This is because the market determines what level is reasonable for a property backed loan of this duration. Britain is perculiar in that the majority of mortgages are set against floating rates. In my opinion this is unwise and leads to inherent instability, changing it would be massive upheaval however. See The Economist two weeks ago for a similar story. |
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Fed Funds vs. UK two week repo
by The Grand Inquisitor
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#1001110
of 3278
27 Nov 2002
12:38 PM |
| Cna anyone tell me the difference between the Fed Funds Rate and the UK base rate = two week repo?? |
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Interesting points Martini
by Knowledge is Power
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#1001109
of 3278
27 Nov 2002
11:06 AM |
Extradry Martini;
Although the US GDP figures released yesterday show a better than expected result, aren’t the expectations/forecasts for next year’s growth implying that it will be almost stagnant?
If this is the case, and with US interest rates at 1.25%, this is revealing how close to deflation the US economy is actually running?
As the US is in a similar financial state, i.e. the consumer boom & house price rises are sustaining the economy, could the bubble burst over there too?
The finite amount of money argument used on this forum to demonstrate that something will give, could be mapped on to the US?
I’m just concerned for the global climate here, because if the US does a Japan that is going to have a domino effect round the world I’d of thought.
Martini, do you feel that the dreaded D word is becoming a more realistic possibility? or do you think that the markets will pick up (both US & UK). And finally, on the topic of War, is this something that could overturn the UK/US economy. I’ve heard it raised several times, but also that in most wars the economic impact is minor? |
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