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| The UK housing market: a bubble about to burst? |
House Price Predictions
by David T
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#1001283
of 3278
 03 Dec 2002
06:34 PM |
Here's my two penn'orth.
First let's split the debate between London/SE and the rest of the UK and also recognise that most houses are bought by people who have never even heard of Hayek or Freedman, let alone understand their theories. Whilst these theories may offer a good way of explaining what has happened in the past in mathematical terms, housing like many other imperfect markets is driven largely by sentiment or shifts in the greed/fear balance.
Typically prices shoot up in London/SE first, and then ripple out across the rest of the country with a 1-2 year time lag. The some trigger (e.g. rise in interest rates, rise in unemployment) punctures confidence and prices start to fall. Last time (1989) it was a sharp increase in interest rates, recession and rising unemployment. This time it appears as though reduced City bonuses, increasing layoffs amongst investment banks, reduction in the number of ex-pats working in London and so on has punctured confidence in the London housing market. Prices have risen to c. 7 times disposable income in the capital, which is at the top of historical ranges. Demand is reducing and supply is increasing (King’s Cross, Paddington and other large developments). Moreover, BTL yields in the capital have fallen to c. 3% in some areas – leading to those with 80+% gearing on recent BTL investments being cash flow negative, even if they can find a tenant. Whilst some will be able to finance this gap for a period, over time this is going to lead to some investors becoming forced sellers.
This leads me to believe that at constant interest rates and modestly rising incomes, house prices in the capital are due for a substantial correction. My view (not necessarily backed up by any hard statistical evidence) is that we may well see a drop of 20-40% from current levels, for prices in the capital, probably occurring over the next 1-2 years. This coupled with increasing rents from those FTBs who don’t want to buy into a falling market might then give a chance for 6%+ rental yields which are required at 75-80% gearing to give a cash neutral position for a BTL investor.
For the rest of the country, say North of Watford, and West of Swindon, prices are still rising very strongly, but are moving above the long term earnings ratios. This is probably sustainable for a period given that unemployment is low and interest rates are low, so there is probably another 25% ‘safe’ growth available until either interest rates or unemployment rise. So, prices can probably rise for another 1-2 years or so outside the South East, and then they may well drop, but probably not as far or as fast as those in London, say 10-15% from their 2004 peak by 2006. This is broadly the pattern of the last boom, where between 1989 and 1991, prices fell by 20% in the SE whilst over the same period prices in the rest of the UK rose by 20% (and then fell from 1991-1993/4).
I don’t want to put £100K (or any other amount) on this prediction, but would welcome reasoned argument from those who want to bring this forum back to the original question. |
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Halifax - You're data isn't worth the paper it's written on!
by Knowledge is Power
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#1001282
of 3278
03 Dec 2002
06:05 PM |
With regard to FTB & being priced out of the market, I find Halifax’s data analysis is very poor, as it doesn’t pertain all the facts.
Have a look at this page (from their October report:
http://www.hbosplc.com/view/housepriceindex/nationalcommentary03.asp
Notice anything strange…?
Have a look at the average wage of a FTB. It’s risen from 22,431 in October 2001, to 30,151 in October 2002. Wow, that’s a 25.6% rise in a FTB salary in 1 year!
How can this be? Has the average FTB’s salary really increased by 25.6% over the course of the year.
No, of course not. What is really happening is that the average age of a FTB has steadily increased and if memory serves me correctly it is currently around 35 years old.
So, has Halifax provided a listing of average wages across the age range… No
Has Halifax acknowledged that the age of a FTB has risen dramatically… No
Has Halifax done a comparison of FTB age & associated average wage 1year ago to allow comparison (I,e. affordability with current prices)… No
BOTTOM LINE, the mortgage lenders tell you what they want you to hear. This is fundamentally about trust and transparency. Make your own mind up what to think about it, but I think its very misleading indeed. |
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Yield curve
by Stuthepooh
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#1001281
of 3278
03 Dec 2002
05:59 PM |
To the Grand inquisitor
The yield curve contains information about the markets future expectations of interest rates. This is crucially important for long term investors calculations to buy or sell.
Rational investors will seek to avoid risk. As interest rate risk is one of the key risks of property ownership, sensible investors will take out 5-10 year fixed rate finance. These fixed rates are priced by the yeild curve at those maturities. Therefore for these market participants, the price of the yield curve at 5-10 years is more important than the level of base rates.
Furthermore, less sophisticated purchasers taking out floating rate finance will still have a view of where medium term rates will go which will influence their decision. This view (whether they realise it or not) will be formed from the shape and level of the yield curve in the medium term.
Stuthepooh |
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Pricing property as an option
by Hoogstraten
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#1001280
of 3278
03 Dec 2002
05:41 PM |
Hi Dark Lord,
I see you believe "...the application of standard finance theory is at best going to be a loose fit" in relation to pricing property as an option.
If we can indeed price property in this way as a "loose fit", with regards to property, how would you calculate:
1. Volatility
2. Time until expiration
Surely, if we can't accurately quantify these factors, there is no fit (rather than a loose fit)? |
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Andy B - adding to your post
by Knowledge is Power
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#1001279
of 3278
03 Dec 2002
05:29 PM |
Good post, I agree with your comment on the public's "demand" for consistently large rises. This is why too many have stretched too far to jump on the band wagon (and many that are FTB are sadly too late!). This is exactly why we are now in a bubble position, and we all know what happens to bubbles...
To add to your comment on the market (e.g. home buyers vs. BTL), if you take the FTB example I'd of thought that a BTL can offer a significantly higher deposit, which puts them potentially in a stronger position than a home buyer. As most BTL are the sorts of properties that FTB would consider, i'd say that:
a) FTB are competing with many BTL.
b) BTL buyers have a stronger position in a rising market due to the larger capital available to invest (e.g. money pulled out of falling stocks/shares. This would certainly help explain how & why so many BTL investors have bought recently.
As for the 40-50% prediction,
Thanks for amending your comment, I'm glad I managed to explain the 'method behind the madness'!
Incidentally, my prediction does not require a fixed point to measure from, as I believe the market has topped out (so at the moment we're close to zero % rises). What I’m trying to say is that my 40-50% fall prediction could theoretically take place in 1 month or 100. The timing of the fall isn't as significant as the current state of the market which is now or will shortly be very, very stagnant.
I realise that Nationwide is not saying this (2% rise in month or what ever it is). But a) I think that their logic is fatally flawed in their calculations as they focus on the middle of the market. But as we all know, it is the bottom & top of the market that is struggling (and will be the break point for a market fall). Furthermore, b) their data is out of date (8 weeks behind home track). To say HP will rise based on a comfy looking middle market is IMHO foolish. But hey they just lend money to people to buy houses so what do you expect them to say eh! |
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Risk Premium
by Andy B
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#1001278
of 3278
03 Dec 2002
05:00 PM |
The Dark Lord:
I accept your argument on the difference between equities and property.
But of course there are reasons for the premium on property to be lower eg The equity market is a pure investment market but the BTL market is only a smaller part of the main housing market. People are buying housing because it gives them a roof over their heads - the BTL investor has to bid against this larger group. Also it can sell back into this 'non-investment' driven market and therefore the 'capital element' of the investment risk is quite different to a 'pure investment' market - which should be driven on real returns only.
This in my view is why those clever enough to move into property in the mid to late 1990's were always onto a winner compared to the stock market. But now - as you rightly state the capital risk appears higher.
The total returns a mid to late 1990's investor in the BTL market has made may never be seen again in our life times - there again - never say never. It is sad some people think the prices seen in mid 1990s are a basic human right and expect (DEMAND) them to be seen again.
Regards,
Andy B. |
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Pricing in the factors
by The Grand Inquisitor
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#1001277
of 3278
03 Dec 2002
04:56 PM |
Dark Lord,
I commiserate on the derivatives volatility (cmos?)
I am wondering two things
a: could we attach some value to the factors that you have mentioned which would affect properties perceived risk (and its pricing)
b: by doing this could we explain any mispricing that might occur as a result |
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Equity vs Property : Risk Premium
by The Dark Lord
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#1001276
of 3278
03 Dec 2002
04:17 PM |
Andy B:
3% may be too high, or too low ... but I would suggest there is a higher premium on property because holding it is inherently more risky, and has larger barriers to entry.
As an example ... trading equities can generally be done in a very liquid market, entry and exit costs are minimal ... and other than systematic risk, the rest is easily diversifiable.
Property on the other hand has high transaction costs (stamp or CGT, solicitors etc), is relatively illiquid and the risks associated with holding it - while often insurable - are relatively costly.
My £0.02 worth.
*Bubbles* |
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KIP - Ok understand what you are saying
by Andy B
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#1001275
of 3278
03 Dec 2002
04:07 PM |
KIP,
OK I understand your maths which is a fall of say 50% from the Present 200 Price which is up 25% on 2001 year end.
So I need to amend my comment:
'I can not believe KIP is suggesting a 50% fall (or 25% on 2000) in house prices!'
Given the adjusted fall (due to our miss-undestanding) I have re-graded my analysis of you from Mad to Daft.
Regards,
Andy B. |
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Vega
by The Dark Lord
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#1001274
of 3278
03 Dec 2002
03:59 PM |
The Grand Inquisitor :
As you seem to be aware, time series by its very nature is only 'accurate' over long periods - and then of course we run the risk of new factors influencing the market, and rendering historical fact obsolete.
The housing market provides neither a proper stochastic time series or demonstrates proper geometric brownian motion, and therefore the application of standard finance theory is at best going to be a loose fit.
Given the vast amount of 'inefficiencies' in the property market compared to say the financial markets, inherently there is going to be more margin for error (and hence I adjust my personal risk premium accordingly).
As you point out, for the long term the rates curve is fairly flat (we're looking at 5% in 15 years according to bloomberg) - so why the post in the first place?
Obviously volatility is going to have an impact, but in a much less direct sense than say a derivative ... additionally the property market moves a lot more slowly, which has both positive and negative benefits from an entry/exit point of view.
I'm far more concerned about distortion in my derivative prices than in property - property is a game for people who don't move fast ... because you don't need to.
With regard to discounted cash flows ... your discount factor is implicit in your yield, and as property is such grotesquely costly beast to enter/exit, minor fluctuations in your DCF net net are irrelevant - you should know that.
Cheers,
*Bubbles* |
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No probs Andy, here's the maths
by Knowledge is Power
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#1001273
of 3278
03 Dec 2002
03:47 PM |
Andy B;
Let me show you my maths:
In 2000, lets say a house is worth £100,000
2000 – 2001 = 20% rise = £120,000
2001 – 2002 = 25% rise = £150,000
2002 – 2003 = 40% fall = £90,000
or
2002 – 2003 = 50% fall = £75,000
Nb: Inflation not calculated.
Therefore; if prices fall by 50% (2002-3), the price will be 25% lower than 2000 price.
I hope this explains my prediction better.
I stand by what I previously said. |
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Risk premium NOT 3%
by Andy B
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#1001272
of 3278
03 Dec 2002
03:46 PM |
The long term risk premium on equities is c2% at present (in real terms) so I think the 3% on property is to high.
I suspect the risk premium on property is also 2% which would of course mean the present prices are 'slightly more' realistic compared to long term equity returns.
I do have a handy formula for based on marginal analysis of property ownership compared to renting - if any one is interested?
Regards,
Andy B. |
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Stuthepooh: Yield Curve Information
by The Grand Inquisitor
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#1001271
of 3278
03 Dec 2002
03:45 PM |
| So what information does the yield curve contain? |
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In Answer To My Critics...
by Rob G
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#1001270
of 3278
03 Dec 2002
03:40 PM |
Dark Lord:
I have not said that an interest rate reduction per se will have no effect on the market.
I said that if buyer confidence starts to fall over the peak then a lowering of interest rates to try to stop the fall will be futile. Why:
1) Even if the base rate falls, lenders will most likely not follow suit, as their lending risks will increase on the downside of the curve.
2) Regardless of how cheap a loan appears, nobody will borrow to buy into a sharply falling market.
I have gone over this several times. Please try to listen.
Andy B:
I think you'll find that the reason for my links to the *factual statistics* from the lenders is for the very reason that they are real and proven.
The reason why there are no links to them predicting a 10% increase are:
1) They are a vested interest group and so their predictions are effectively worthless.
2) Their track record for making predictions in the past has been nothing short of pathetic. I can't remember one prediction in the last year where either Halifax or Nationwide have been correct.
Market Increase Junkies:
I'd just like to ask anyone who believes that the market may 'fall slightly' (i.e. 20% or so) what exactly they expect will be the factor which prevents the market from falling by more than this amount?
I'm very interested to hear any suggestions.
And please, no quotations. I really can't be bothered reading them. |
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Dark Lord short term to discount long term
by The Grand Inquisitor
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#1001269
of 3278
03 Dec 2002
03:30 PM |
Dark Lord,
I see you are using a long term average premium atop a short term interest rate (though at present this does not make a huge difference) and a longterm growth rate in cash flow to discount a cash flow. Over any given period, will this not lead to a distortion in your pricing if there is significant volatility in any of these? |
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