496 replies to this topic

[DrBubb]

UK Property - The former HPC addicts' thread



(this thread was originally entitled: "Levitating Property")

By all rights, UK property should be falling- and falling hard- by now, just as it is currently in the USA.

Last summer, the Uk cycle was about one year ahead of the US, but US propery has now caught up with the UK, and has started on what looks like a long descent, at "Crash Cruise Speed", but somehow UK prices have stayed up, and in some locations have even shown some healthy incraese in the past 12 months.  

This thread is to consider what is going on, and how long it can last

The Cycle of Bubble psychology


= =

+ UK investors have "taken leave of their senses", and let bullish psychology over-ride rational calculations.  This is apparent in measures like the higher cost of owning property than renting (Low yields), high ratios of property prices to incomes, faster appreciation of property prices than incomes.

+ August 2005's unwarranted rate cut encouraged investors to think that prices cannot fall, and the negative impact of the recent 0.25% rate rise has occurred too recently to show up in the (delayed) statistics,

+ Some sectors of the London economy have enjoyed big rises in income.  This includes Russian billionaires who have seen their asset values inflate, highly-paid Hedge Fund managers who enjoyed a year of good gains, and other jobs in the City, who are living off asset gains fueld by excess money creation.

+ Lenders are more and more aggressive, breaking historical lending policy guidelines

+ Parents are passing equity to their children, encouraging them to overpay at/near the market top, based on the hairbrained theory that it cannot be wrong or risky "to get on the ladder"

+ Neophyte investors are pouring into the market with little experience on the hope that property will outperform other asset classes.  Many are overpaying, because without experience, they fail to understand risks and expenses like voids, and property maintenance expenses

AS EVIDENCE for some of the above, there are see interesting articles in today's FT:

1/
Mortgage lending stays at record levels:
Equalled previous records in July- as banks lent £5.7 billion last month, matching May 2006.  Gross lending reached £30.4 bn in July, the second-highest on record.   FT House Price index registered a 5.4 percent rise in the 12 months to July 2006.  However, the July figures hardly registered July's surprise rate rise.  And many borrowers were simply shifting away from more expensive obligations, as credit card debt outstanding fell by an underlying £319mn in July, as against a decline of £268mn in June.  ((pg5, FT)

2/
M&A Surge fuels rise in city job vacancies:
Average city salaries have topped £50,000 for the fifth consecutive month. Number of jobs within London's international financial and professonal services sector, by year end 2006 should have expanded by 10% in the past three years to a record 335,700, exceeding the total of 324,100 jobs at the height of the tech boom in 2000.  ((pg3, FT Aug.19/20))

= = = = =
LINKS:
Headlines and Articles : http://www.financema.../news/property/

[No6]

Go to any bank/building society website and do the test of what you can borrow from them.  Everyone I go to now will lend around 5 to 6 times my income.  Two or three years ago, it would be 3 to about 4.5.  Sloppy lending practices rule the day.

In terms of behaviour, the market is showing all the signs of a top.  I get the impression that there are so many schemes going on, all with the intention of keeping things ticking over.  Came across one today which is a variation on a scheme that has been around for a year or two.

BAL.

Anyone guess at what it stands for?

Buy Already Let.

Some details from a Barrett advertisement.

"Let Barrett take away all the hassle out of buying an investment property with our Buy Already Let option.  We'll guarantee you 7% annual rental income for 2 years."

Here's the beauty.

"No need to find a tenant".

Why?  Because Barrett take on the responsibility to sub-let the property.  Not clear whether they then rent it out, or it stays empty for the 2 years.

In this example, on a £160,000 property, Barrett guarantees to pay £22,400 back.  So, effectively what they are saying is, you buy this property for £137,600.  In the official figures however, it probably shows up as a 160 grand sale!!  Fait acompli!

[DrBubb]

Exactly, 6.

Barratt flogs off a new property above market,
then, the buyer discovers the rental value plummets after the "guarantee period" expires.
It is no longer a "new flat", and hence less desirable.

[The Sparrow]

No6, on Aug 19 2006, 05:22 PM, said:

In this example, on a £160,000 property, Barrett guarantees to pay £22,400 back.  So, effectively what they are saying is, you buy this property for £137,600.  In the official figures however, it probably shows up as a 160 grand sale!!  Fait acompli!

This kind of activity has been going on for quite sometime. Cashback deals, Stamp Duty Paid, Deposit Paid, guaranteed this and guaranteed that.

The Government must like it (more stamp duty)
The Banks like it   - More interest due to a higher mortgage
(to state the obvious) it artifically inflates prices.  - So the "feel good factor" keeps on

There are even more "lucrative" offers out there, most of which I'm surprised are legal.

But there's only so long they can continue to "hoodwink" the market ... Unless of course there really is one born every minute

[DrBubb]

MISSED POINT... from GHPC:


"you should really add in immigration into the mix (Around a million skilled, unskilled and professional Eastern European EU citizens in the past couple of years, another million or so expected in the coming years upon Bulgarian and Romanian entry to the EU next year"

AGREED. That should be one of the bull points.

What's holding it up?
I have tried to answer my own question, and appreciate the additional points and clarifications made above.

TO ME,
The two most vitals props are:

+ Sentiment, whih has remainined bullish, and

+ Aggressive lending, which has amazed me, since the risk being pumped into the market now includes much of the "toxic" variety, and I am surprised thee is so much appetite for it. And the BoE and other regulators seem to be asleep at the switch. There will be hell to pay one day.

[No6]

As statistics go, the housing market is every bit as open to manipulation as those other mainstays of the new paradigm economy, inflation, growth and unemployment.  One of the key stats for me this month has been the increase of 70,000 properties for sale or rent on Rightmove (see the Rightmove thread).  Hardly a shortage.

[ParticleMan]

DrBubb, on Aug 19 2006, 08:00 PM, said:

"you should really add in immigration into the mix (Around a million skilled, unskilled and professional Eastern European EU citizens in the past couple of years, another million or so expected in the coming years upon Bulgarian and Romanian entry to the EU next year"

... and so what completely elides these dingleberries (and that's being generous, the right wing spin doctors are out en force at present selling fear to the gullible and impressionable by the barrow load, for their own ends) is that the economic migrants are likely to have a far higher impact on GDP growth than on asset prices, with their input to the former far outstripping any upward pressure on the latter; for additional clue, ask yourself precisely which segment of the able bodied population are likely to move, again, to pursue any opportunities thrown their way - citizens holding dual nationality who likely as not have savings, investments, and family abroad - and who have done this before - or - established, net borrowers of state benefit?

What's holding it up? Folk, their bankers, and most hilariously, their pension fund managers, all of whom are unable to discriminate speculative momentum plays from investment (or worse still deliberately and cynically pitch the former as the latter to the criminally naive); the increased money supply used to paper over the 2001 depression has gone through the system like a dose of salts and is now sitting as badly risk-adjusted, collatoralised debt issues on the books of the pension and insurance industries at large - is my guess.

This time it really will be different - the retirement pot has been spent twice over already and the remaining tax base can't afford third round funding (and would be violently disinclined if asked in any case); populations who spend a lifetime mortgaging their future rather than investing in it will reap all the rewards due.

[No6]

ParticleMan, on Aug 19 2006, 09:01 PM, said:

... and so what completely elides these dingleberries (and that's being generous, the right wing spin doctors are out en force at present selling fear to the gullible and impressionable by the barrow load, for their own ends) is that the economic migrants are likely to have a far higher impact on GDP growth than on asset prices, with their input to the former far outstripping any upward pressure on the latter;

A very good point.  It may be that in London, foreign, especially it seems at the moment Russian and Chinese money can move the housing market, but as a whole the impact is small.  It also may be the case that some UK BTL landlords have no problems putting 5, 10, or whatever number of economic migrants to a house and that helps them to continue to buy, but all this cheap labour coming here and keeping wages down, how does that help keep house prices up?

[Yogi]

The key factor for me is sentiment. Only if/when we have seen annual, national, nominal headline prices quoted as negative will we see what the UK property market is really made of. I think this day will come, but wouldn't like to say when! It may take a recession and much higher unemployment (or the fear of) to initially tip sentiment to bearish and initiate those first sustained falls. The market does not look like crashing "voluntarily", ie. it will need to have sense knocked back into it from external factors rather than failing from within.

All these new BTL investors swear they're in it for the long term, but how many of them will change their mind when they have no capital gain prop to support their delusions? While the national averages are still rising (apparently), feeding their feelgood factor, I bet alot of them don't even bother working out what has happened to prices in their specific area.

The immigrant point works both ways. How many economic migrants will head back home in the event of a recession, adding momentum to falling prices?

[No6]

Yogi, on Aug 20 2006, 10:50 PM, said:

The key factor for me is sentiment. Only if/when we have seen annual, national, nominal headline prices quoted as negative will we see what the UK property market is really made of. I think this day will come, but wouldn't like to say when! It may take a recession and much higher unemployment (or the fear of) to initially tip sentiment to bearish and initiate those first sustained falls. The market does not look like crashing "voluntarily", ie. it will need to have sense knocked back into it from external factors rather than failing from within.

Agreed, but when you are dealing with statistics that can be manipulated, like anything else, will we know from the official figures or from VI's that prices are falling?  I've long since come to the conclusion that if house prices were to fall 25-30%, the VI figures will somehow show this as 5 - 10%.  You only need to look at inflation and the unemployment figures to see that they don't really mean anything anymore and that statistical manipulation is all part of, and vitally important to, new paradigm economics.

[George Mainwaring]

An interesting topic.

Following the mid 2004 peak the market went into a classic stall phase.  This showed up in all the indexes (HPI falling toward zero) and the anecdotal evidence to back this up was everywhere (empty EA's, EA inventories climbing, houses not shifting).  IIRC the usual spring bounce (usually seen even when the market is crashing) didn't appear in 2005.

It looked like the correction would start in earnest late 2005 leading to the scenario in DrBubb's opener.

Then the Clownettes on the MPC outvoted the govenor's and we had the "bizzare" rate cut.  The "common view" really does seem to be that BOE independence combined with Gordon Brown's economic genius means that the normal IR level for Britain (sorry hate the name yUK, must be my age) is 3.5% and any deviation from this is an abberation. There was then a bullshit frenzy in the mainstream media which portrayed a situation where IR's had peaked and were heading back to the "normal" 3.5% leading to a "New Boom in House Prices".

Although prices in many areas are at least soft, if not falling a little, the burst of activity was enough to flip the indicies upward and market activity picked up.  Even the Halifax / Nationwide weren't expecting this and they will always accentuate the positive.  This is where we are now.

We've just had a rate rise rather than the "long predicted" cut and it looks like we may get another before Christmas.  This seems to have brought about an "oh shit" moment in the media which may tigger a sharp but (likely) small pull back.  The latest Rightmove hypeometer reading may be the first sign of this.  If, as might be expected, this sets the snowball in motion, then it will build on itself until the avalanche is finally triggered.  And there's a lot more snow up there now.......

[No6]

George Mainwaring, on Aug 21 2006, 02:29 PM, said:

We've just had a rate rise rather than the "long predicted" cut and it looks like we may get another before Christmas.  This seems to have brought about an "oh shit" moment in the media which may tigger a sharp but (likely) small pull back.  The latest Rightmove hypeometer reading may be the first sign of this.  If, as might be expected, this sets the snowball in motion, then it will build on itself until the avalanche is finally triggered.  And there's a lot more snow up there now.......

Yes, and here's a classic from today's Money Morning.

There were a number of uncharacteristically downbeat pieces on the property market spread across the weekend press.

Since the beginning of the year, the pundits have been itching to proclaim the return of the boom, with prices in London apparently leading the way. So why the sudden change in tone? Well, after this month’s “shock” rise in interest rates, the estate agents are getting edgy.

“If we keep saying that house prices are rising, the Bank of England might hike rates even further,” they imagine to themselves. “And that could - gasp - damage the market.”

To our minds, it is nothing less than rank self-delusion for property pundits to imagine that the rash of half-baked little surveys they churn out will make any difference to the mindset of the Bank’s interest-rate setting committee - which is after all, meant to be targeting inflation, rather than house prices.

But still, you can rarely accuse an estate agent of thinking far beyond their next sale. And surprise, surprise, just as we said would happen last week, the data on the property market has taken a sudden downturn…

Recently-listed property website Rightmove reports that asking prices for houses fell by 1.6% in August, with the annual rate of asking price inflation eased to 9% from 10.6% in July. Director Miles Shipside said “Prices are now cooling off and require no further intervention from the Bank of England.”

We’re sure that Mervyn King will be glad of Mr Shipside’s advice. There may even be a section in the minutes of next month’s meeting where Mr King turns to one of his colleagues and says: “What with inflation running rampant, and consumers up past their eyeballs in debt, I was going to vote for a rate rise. But thankfully, Miles Shipside reminded me that the property bubble might pop if I did. So a 0.5% cut it is.”

Rightmove’s index is at best, a measure of estate agent confidence. It’s taken solely from the asking prices of houses that are new on the market that month. So any houses that have had their price reduced since going on the market are not included.

A far superior asking price survey, from Home.co.uk, covers both new properties and those that have been on the market for some time. According to Home, asking prices fell 0.6% this month, and are down 2.2% for the year as a whole – a markedly different picture to Rightmove.

The truth is, the pundits are right to be worried. One of the more bearish columns came from The Daily Telegraph’s Edmund Conway. “I’m starting to get a little worried about house prices,” he said. “I still don’t think prices will crash, but there’s something in the air that makes me nervous.”

Perhaps Mr Conway had been reading his own newspaper. The personal finance pages contained a ‘financial makeover’ page, running through the balance sheet of a PE teacher and her husband.

The two were in their late twenties, recently married, and had bought a house together. They had a £205,000 two-year fixed-rate mortgage at 4.69%, costing them £890 a month. The trouble is, it was interest-only.

“Once the fixed-rate period is up next year, we would like to try to switch the mortgage to a repayment basis, so that we are paying back some of the capital too.”

Looking at the figures, the experts estimated that if they make the move, with interest rates rising, a 5.5% fixed rate capital repayment mortgage would cost them £1,310 a month. That’s an extra £420 a month they have to find.

If you assume they’re both basic rate taxpayers, that means that to maintain their current standard of living, they will have to earn about an extra £7,600 each year just to pay the mortgage.

That’s by no means impossible for two people at the earlier stages of their careers. But as most of us are aware, one thing that tends to follow marriage is children. And children are expensive and they also have the potential to take a lot of time out of a woman’s working life.

It’s stories like these that are really worrying. This is an ordinary, working couple on slightly-above average earnings – there’s nothing to suggest that they are less financially savvy than the rest of the population. And yet they have taken out an interest-only mortgage, with no plan for paying off the capital, assuming they will be able to make up the slack at some point in the future.

If this is the kind of situation that the average ‘sensible’ couple is getting themselves into, then we should be worried about the housing market. It’s clear that for most people there is no give in the system – if personal disasters strike, or jobs are lost, or interest rates rise much further, their finances will not be able to take it.

We imagine that this is the “something in the air” that’s making The Telegraph’s Mr Conway nervous.

[No6]

And here is the latest scheme.  They must have got the blueprint for this from some of the busted Japanese banks in the late 80's.  As reported by Money Morning, Kent Reliance Building Society's ultimate bubble mortgage.  The one were you pass on the debt to your unborn kids.

"We’re sorry to return to the UK property market, our favourite obsession, but this little gem just had to be acknowledged. Kent Reliance Building Society has now released the ultimate mortgage for today’s debt-laden generation - the mortgage that you never have to pay back.

Purchasers can pay interest-only until the day they die, and then pass the debt onto their children - or perhaps a lucky friend. The beneficiary of this generous inheritance can then live in the house (continuing to pay the mortgage, of course), or pay off the debt if they don‘t want to keep it on. We’re not sure what happens if you have fallen into negative equity by the time of your death - though it might be a good way to get revenge on particularly ungrateful offspring.

This is incredible. People buy property because they believe renting is dead money. But this mortgage gives you the worst of both worlds - you sign a lifetime lease to rent from the bank which ties your offspring to the house as well, but still have to pay all the maintenance bills for the house yourself. Any landlord in the country would rightly cut off an arm to be able to get away with offering the same deal.

This kind of ludicrous offer has got to be proof, for the masses of people who still seem to need it, that the housing market in this country is in a bubble of unprecedented proportions - similar products were all the rage in Japan just before the bubble popped in the late Eighties.

In any case, we doubt many people will be taking it up - with inflation keeping pressure on interest rates to rise, we don’t imagine it will be much longer before the market finally collapses under its own weight."

[No6]

And this from the Rude Awakening newsletter.

"The Aussie housing market is slumping after only three
interest rate hikes. What happens when you take a nation of
people on adjustable-rate mortgages and pummel them with
seventeen straight rate hikes? Could the convulsing
Australian canary be a harbinger of things to come for
folks back here in the U.S.?"

And for the UK as well?  We have had one rate rise and the prediction is for at least one more this year and maybe one early next.  2-3 IR hikes will test this market, considering that it needed the lifeblood of one IR decrease a year ago to give it the latest bubble spike.  Underneath it all, it really is like a house of cards waiting to fall.

[No6]

And here's a sign of desperation or madness.  Speed dating with a difference.

"A speed-dating firm with a difference is gearing up to stage its first event - designed to come to the aid of struggling first-time buyers.

HouseDates will launch within the next month for those looking not for romance but for a property partner."

----------------

"They will be attended by up to 50 potential property co-owners. Each will go on several "mini dates" lasting four minutes with those deemed a suitable match.

Participants are urged to discuss what they are looking for in a potential co-buyer and what they are like to live with, as well as being open about deposits and salaries. Representatives from Share to Buy and a solicitor will be on hand to give information and answer questions on the process of buying together."

http://www.timesofma...e.php?id=235188

[No6]

Meanwhile, back in La La Land (UK Version), the bank of Mum and Dad comes to the rescue again.

The BBC asks, How hard is it to afford a house?  

How about the parents giving a £100,000 deposit on a £170,000 house.

"Lots of people get money from relatives like grandparents. I don't see how anyone can afford to buy otherwise, there's no other way. Just while we were looking prices were going up."

http://news.bbc.co.u...ess/5145090.stm

[No6]

And another gem from Money Morning.

So pushing the spin aside, what’s the underlying reality of the housing market? The market recovered last year because interest rates fell - but importantly, also because lending was relaxed. More money was made available, so people took advantage of it and dived into buy-to-let and got on the ladder by taking out interest-only mortgages with no way of paying back the capital.

Lenders are still finding ‘creative’ ways of slackening lending criteria. Kent Reliance building society’s concept of the ‘deathbed’ mortgage, whereby you pass your mortgage onto your children, is one innovation. Another is the gradual acceptance of the idea that borrowing over 30, or maybe even 40 years is perfectly reasonable.

And people still believe that house prices will keep rising. Why? Because they’ve been rising for about 10 years now. It’s exactly the same as in early 2000 - people thought stocks and shares would keep rising. They had done in the past - why change now?

The trouble is, people are now making very expensive investment decisions based on the notion that house prices will keep rising. In The Telegraph at the weekend, they spoke to one amateur buy-to-let couple who freely admitted that their first investment property - a two-bedroom flat in Bournemouth - would be costing them about £50 to £100 a month as the rent didn’t cover maintenance and mortgage costs.

“It‘s such a good investment,” they said.

This is like buying a share and paying the company an annual dividend to hold onto it, simply because you believe the capital growth will outweigh the costs in the long-term. Sounds ridiculous - but my colleague Cris Sholto Heaton reliably informs me that something very similar to this actually happened in Japan. When? Just before the stock market bubble burst in the early 1990s, of course.

Deathbed mortgages, “good investments” that cost you £100 a month to subsidise someone else’s living costs - property investors have lost their grip on reality. But with interest rates rising, unemployment rising and the world’s biggest economy heading for a massive slump, reality is about to bite back hard.

And all the spin in the world won’t make a bit of difference.

[Cuthbert Calculus]

At first I thought this was a bearish peice on the BBC website.

http://news.bbc.co.u...ess/5319308.stm

[Whosthedaddy?]

Frizzers, on Sep 7 2006, 08:09 AM, said:

At first I thought this was a bearish peice on the BBC website.

http://news.bbc.co.u...ess/5319308.stm

The BBC Bearish on property    

[Cuthbert Calculus]

House prices continue to rise in the UK, according to the BBC

http://news.bbc.co.u...ess/5322616.stm