London Property Notes - Fall 2010

[drbubb]

London Property update - Fall 2010

FBB - Time for another property show?

=============================

 

2006-10 - When even Elvis got priced-out of London property.

 

The beginning of this old podcast (mid-2007) popped up on my iTunes player by accident this morning:

 

UK Housing - Moon-Bound or Pear-Shaped?

http://commoditywatch.podbean.com/2007/07/...or-pear-shaped/

 

As I listen to John Wolsey, I felt a sense of deja vu.

 

"Agents have to learn how to operate in a falling market...

Asking prices have to come down.

... The media will report the market is falling... as asking prices get market down to a more realistic level."

 

The talk then, was about Russian buyers. Now it's the Chinese.

 

Greater London could now be set for a greater drop

 

(Data per Rightmove)

Mon - Gr. London :: - U. K. -

Jan 2007 356,192 222,859 159.8%

Feb 2007 359,989 224,802 160.1%

Mar 2007 366,302 228,183 160.5%

Apr 2007 379,846 236,490 160.6%

May 2007 385,199 237,361 162.3%

Jun 2007 387,898 239,317 162.1%

Jul 2007 394,730 240,001 164.5%

Aug 2007 394,268 241,474 163.3% - UK peak

Sep 2007 384,439 235,176 163.5%

Oct 2007 403,637 241,642 167.0%

Nov 2007 412,731 239,986 172.0% - London peak

Dec 2007 384,632 232,396 165.5%

Jan 2008 398,476 230,428 172.9%

Feb 2008 402,233 237,856 169.1%

Mar 2008 407,383 239,655 170.0%

Apr 2008 403,545 239,521 168.5%

May 2008 404,541 242,500 166.8% - Higher UK peak

Jun 2008 399,010 239,564 166.6%

Jul 2008 400,258 235,219 170.2%

Aug 2008 379,162 229,816 165.0% - London low

Sep 2008 394,248 227,438 173.3%

Oct 2008 395,560 229,691 172.2%

Nov 2008 390,340 222,979 175.1%

Dec 2008 391,721 217,808 179.8%

Jan 2009 386,653 213,570 181.0% - UK low

Feb 2009 387,988 216,163 179.5%

Mar 2009 398,867 218,081 182.9%

Apr 2009 387,161 222,077 174.3%

May 2009 397,646 227,441 174.8%

Jun 2009 397,140 226,436 175.4%

Jul 2009 402,761 227,864 176.8%

Aug 2009 387,265 222,762 173.8%

Sep 2009 390,768 223,996 174.5%

Oct 2009 416,157 230,184 180.8%

Nov 2009 403,069 226,440 178.0%

Dec 2009 398,426 221,463 179.9%

Jan 2010 407,731 222,261 183.4%

Feb 2010 427,987 229,398 186.6%

Mar 2010 417,461 229,614 181.8%

Apr 2010 421,822 235,512 179.1%

May 2010 420,203 237,134 177.2% - Higher UK peak

Jun 2010 429,597 236,332 181.8% - Higher London peak

Jul 2010 422,248 236,332 178.7%

Aug 2010 405,058 232,241 174.4%

Sep 2010 399,019 229,767 173.7%

 

= = = = =

LINKS:

London Luxury Down :: http://www.housepricecrash.co.uk/forum/ind...howtopic=151656

HPC - Falling rents ? :: http://www.housepricecrash.co.uk/forum/ind...howtopic=151716

HPC - Space poll .... :: http://www.housepricecrash.co.uk/forum/ind...howtopic=151719

[drbubb]

I saw : "Wall Street - Money Never Sleeps" last night, and so maybe this bit of the old podcast really amazed me.

 

About 43:30 minutes in:

http://commoditywatch.podbean.com/2007/07/...or-pear-shaped/

 

We are talking about the 2007 boom in Self-certified mortgages, and sub-prime lending into the UK.

Dominic says:

"Who are the major lenders, are they listed, and how do I short them?"

 

John Wriglesworth answers:

44 mins. in:

"Not saying you should short them, some of them are my clients... Most are specialized arms of US Investment banks.

Adias and Mortgages PLC - backed Merrill Lynch... Freebrand at Lehmans ...Futura, opened by Citibank ... pouring money into the sub-prime market."

 

Had you shorted those exact US banks: Merrill Lynch, Lehman, and Citibank, you would have done uncommonly well.

 

Citibank / C ... update

 

The other two went bust (Lehman), or got taken over.

 

As the UK begins the second leg down in its property market, are banks like...

 

Barclay's / BARC.L ready for another big slide down? ... update : 1yr-W : 1yr-D

[denarii]

i was in a lettings agency in fulham yesterday as we are moving to a house rental. i asked about the two up two down type houses you see in the victorian streets around there and they are selling for about £800k, having been over £1m at the peak in 2007. so they are off 20-25%. and that is with zirp mortgage interest rate cushion. when she asked if i was looking to buy i said i would wait for interest rates to rise and that would squeeze a few people out, she didnt say anything in response to that.

[drbubb]

i was in a lettings agency in fulham yesterday as we are moving to a house rental. i asked about the two up two down type houses you see in the victorian streets around there and they are selling for about £800k, having been over £1m at the peak in 2007. so they are off 20-25%. and that is with zirp mortgage interest rate cushion. when she asked if i was looking to buy i said i would wait for interest rates to rise and that would squeeze a few people out, she didnt say anything in response to that.

 

She must have HATED to hear that, since she knows it will be a long wait to get a commission from you.

In fact, by then her firm may be out of business.

 

 

I could see Rightmove's Greater London index falling from the current level of about £400,000 to about £300,000 or even about £250,000.

If you double these figures, you may have an idea of where the "benchmark house" you are talking about would be valued.

 

The speed of decline is likely to increase if and when rates rise. At some point, the foreigners may see taxes on property rising while prices are falling, and realise that they are being played as suckers.

[Member100]

As someone from HPC pointed out, this MoneyWeek article could have been writtedn by someone from here or HPC

 

http://www.housepricecrash.co.uk/forum/ind...howtopic=151614

 

Banks don't exist to meet people's aspirations

 

But wouldn't a sustainable housing market be rather nice? We like stable prices in most other areas of our lives. And perhaps if lending patterns were more stable, we could get a better handle on exactly how much of a problem the physical supply and demand side really is. Rising prices would signal genuine shortages of property, rather than gluts of credit.

 

As for 'aspirations' - since when did banks and building societies exist to meet people's aspirations? As small business owners might be painfully aware, they technically exist to direct depositors' capital towards enterprises that will produce a decent return, with a bit on the side to cover the bank's costs. That's why we want them to be careful with who they lend money to.

 

They're not there to give you whatever amount of ready cash you need to meet your 'aspiration' to open a café in a street that already has ten of them. Or your 'aspiration' to leverage your £30,000-a-year income into a £200,000 mortgage. And before the bust, banks were only happy to help people with their 'aspirations' because they thought they were offloading the risk to some other stupid chump.

 

First-time buyers need lower house prices

 

Here's what will help first-time buyers meet their aspirations: lower house prices. It's much easier to save up a 25% deposit if property prices are actually affordable.

 

Now, we can have a debate about the wider economic damage a further fall in house prices would have right now. It probably wouldn't be pretty. But let's not pretend that this is all about helping the poor huddled masses of first-time buyers, condemned to rent (as if that were a bad thing in itself). This is about lobbying to keep propping up banks and homeowners at the expense of savers and long-term economic stability.

 

Of course, with the Bank of England rate already as low as it can go, and inflation surprisingly sticky, there might not be any way to prevent house prices from falling. In which case, why not take steps right now to prevent the next boom and bust cycle from kicking off?

[denarii]

She must have HATED to hear that, since she knows it will be a long wait to get a commission from you.

In fact, by then her firm may be out of business.

 

 

I could see Rightmove's Greater London index falling from the current level of about £400,000 to about £300,000 or even about £250,000.

If you double these figures, you may have an idea of where the "benchmark house" you are talking about would be valued.

 

The speed of decline is likely to increase if and when rates rise. At some point, the foreigners may see taxes on property rising while prices are falling, and realise that they are being played as suckers.

 

yeah i held back from what i really think those properties will reach at the nadir as she is 'long' on real estate afterall.

 

 

[denarii]

She must have HATED to hear that, since she knows it will be a long wait to get a commission from you.

In fact, by then her firm may be out of business.

 

 

I could see Rightmove's Greater London index falling from the current level of about £400,000 to about £300,000 or even about £250,000.

If you double these figures, you may have an idea of where the "benchmark house" you are talking about would be valued.

 

The speed of decline is likely to increase if and when rates rise. At some point, the foreigners may see taxes on property rising while prices are falling, and realise that they are being played as suckers.

 

 

btw the '4 bed houses' around parsons green, which i guess are larger dimensions inside are around £2m at the moment. they is basically upper middle class lawyers, bankers etc mortgaging themselves up to the bollocks because the wife wants a nice family home. you can imagine what a protracted corporate/ equity market downturn with inflaiton would do to their prospects.

[drbubb]

yeah i held back from what i really think those properties will reach at the nadir as she is 'long' on real estate afterall.

An Agent like the one you described will be accustomed to Selling hard to Buyers, trying to convince them to lift their buying ideas.

 

But it is a new world now. The way she will have to get transactions done, will be to first find that rare commodity - a serious buyer and then hammer one of the available Sellers down to a level that the Buyer is willing to pay.

 

She probably realised that your price ideas were too far from current levels to be worth the exercise. And the Sellers are not yet mentally prepared for the hammering that they will have to experience in order to get a sale completed.

 

It will take time for the Agents to "shift mental gears" and adapt to the new market realities.

 

btw the '4 bed houses' around parsons green, which i guess are larger dimensions inside are around £2m at the moment. they is basically upper middle class lawyers, bankers etc mortgaging themselves up to the bollocks because the wife wants a nice family home. you can imagine what a protracted corporate/ equity market downturn with inflaiton would do to their prospects.

Poor bastards. There's a huge adjustment of expectations and aspirations coming, and there are going to be quite a number of broken marriages. But the spouses who leave their struggling husbands and "get the home" are going to find that it is worth much less than they expect, and the home may come from a highly burdensome mortgage too.

 

A wife with the ideas of Winnie Gecko (from "Money Never Sleeps") is going to be a great advantage in the years ahead

She gave up her $100 Million for her fiance's dream, and had none of her father's great hunger for money and power.

[drbubb]

Weren't we at this stage 18 months or so ago? I remember when one of these two first started reporting rises at the beginning of the bear trap / dead cat bounce. We scoffed at their figures then, but turned out (annoyingly) that they were right... I believe we'll only be locked in for a fall once the YoY turns negative.

Who made that mistake? Not I.

 

It is VERY different now:

 

+ Interest rates have been at present levels for a long time, so there is no sudden drop to fuel fresh buying

+ UK Builders are well off their highs, and drifting lower, not shooting up above downtrends

 

WHAT do you think would drive a sudden pick-up in buying? Mortgage approvals are way down, showing there is little demand from buyers, despite the near record low rates.

[frizzers]

I think there's a lot of premature congratulation going on here.

 

There's a slowdown, no doubt, but prices haven't crashed.

 

Given that most people have their wealth tied up in assets rather than cash, there is a strong chance that the majority would rather see the currency crash than asset prices. So far the powers that be have been more inclined to prop up assets rather than the currency. Why should that change?

 

And even if - and it is still an if at this stage - London house prices fall to £250,000 - £300,000, that's still only 2004-6 levels. Big deal.

 

The popularity of HPC and of property price discussions on this site demonstrate that a lot of people want a house, indeed are obsessed with the thought of owning one. And a lot of savers are getting hacked off with no return on their money, so will be looking to roll it into assets.

 

All in all, stick with your gold to house price ratio . The outcome of this one is far more certain ...

 

 

 

 

 

[drbubb]

WE are only a few months into this slide, as we head into the autumn, a time where price falls often happen.

 

What do you see, CC, that could possibly prevent a crash?

The forces are gathered, and although the battle is only beginning, the troops on the Bear side vastly outnumber those on the Bull side.

 

If the UK wants to crash its currency, there will be other countries that want to get there first. And the 2008 "remedy" of cutting rates to ZERO, has been used once. It will not have the same impact, if rates drop by only a few basis points.

 

From what I see and hear, buying from China (and HK too) is helping to hold up Newbuilding prices, but how much longer will it be possible to find gullible foreigners when it becomes obvious that prices are sliding.

[cranberryDog46]

WE are only a few months into this slide, as we head into the autumn, a time where price falls often happen.

 

What do you see, CC, that could possibly prevent a crash?

The forces are gathered, and although the battle is only beginning, the troops on the Bear side vastly outnumber those on the Bull side.

 

 

isn't stagnation more likely until interest rates rise

[drbubb]

isn't stagnation more likely until interest rates rise

There's NO DEMAND, as you can see in mortgage approval figures.

Some will have to sell, and soon the banks will have foreclosures to dispose of also.

 

Rising supply, and slack demand is a formula for price falls.

[John Doe]

isn't stagnation more likely until interest rates rise

Rates are key IMHO, until they rise (properly) there could likely be stagnation, or a gentle drift down of prices over a year or so. However, I still think rates could stay low for far longer than many here believe. As stated before, for all the problems here, we are not Greece (or the other PIIGS).

 

On the other side, two friends have recently bought cheap flats (cash purchases, ~6-7%yeild) with sitting tenants, as they were so fed up with dismal returns on their savings.

 

I gave the usual reasons for them to wait, but the response was the same in both cases.

 

"Yes prices can go down, but inflation is eating away at the capital anyway".

 

I suggested that if they were set on this route and not going to try and sell, then at least get an equivalent 5-10 year fixed mortgage (on their main property) for ~5% to hedge the risk.

 

PS Just to point out that I think these are fairly isolated cases and not likely to hold up the market

 

[denarii]

dont forget the uk economy has been externally propped up from a CA deifict and government deficit for years. that is going away

[drbubb]

I gave the usual reasons for them to wait, but the response was the same in both cases.

 

"Yes prices can go down, but inflation is eating away at the capital anyway".

 

I suggested that if they were set on this route and not going to try and sell, then at least get an equivalent 5-10 year fixed mortgage (on their main property) for ~5% to hedge the risk.

It is my firm view that "inflation" will not help property prices unless and until Incomes start rising.

And even then, it will be a race between rising incomes, and the impact of inflation causing rising rates.

 

Remember: falling inflation helped to push up property prices, since rates fall. Why should property also benefit from the reverse process?

 

Of course, if incomes started shooting up, it would be good for property, but at this stage, I cannot see that happening.

 

In the 1970's and 1980's, Britain had the benefit North Sea oil exports, and rising oil prices. Now higher oil will HURT the UK balance of payments.

[drbubb]

In response to the notion that "people will only sell gradually, at an acceptable price:

You are missing the 'elephant in the room' and that is the huge number of people who 'invested' in houses as a retirement fund in the form of BTL or second homes. Retirement, or substantial percieved drop in value can 'panic' these folks into selling. As in shares, panic on sudden drops does ensue. We just haven't had the sudden drops yet. The uptick over the last 12 months has gone some way to calming the masses and making them believe that it was still a good investment.

 

This country has never been in this position before, so respectfully, your age and experience doesn't mean a thing. It has the potential to be a significant event as it has been in the USA. We shall see if it occurs.

 

That's an excellent point.

 

And I think foreigners will turn sellers too, if the government starts imposing extra taxes on property owners.

[drbubb]

Does this stat sound right to people here?

Stat from the other day from RICs re current selling patterns:

 

12.5% sell in the first month.

 

Just 35% sell in the first year!!!

 

Patience is required. Keep your nerve. If you find yourself still on the market in a year's time, you need to adjust your price upwards to reflect hpi in the intervening period.

 

btw - I'm not even sure if that stat is not skewed by people taking their houses off the market so it's possible it's even worse than that.

Is that really true? Are they just flippers?

And what about stamp taxes, and other transaction costs?

[John Doe]

It is my firm view that "inflation" will not help property prices unless and until Incomes start rising.

Totally agree, only wage inflation will help (more so, if you have a long term fix) and wage inflation doesn't seem likely at all in the near/medium term.

 

My point, to them, was that rises in rates over the 10 years are inevitable.

[frizzers]

What do you see, CC, that could possibly prevent a crash?

The forces are gathered, and although the battle is only beginning, the troops on the Bear side vastly outnumber those on the Bull side.

 

All this bearish sentiment could be a bullish indicator, if you wanted to use that overused, facile argument, which I don't.

 

What could prevent a crash?

 

Off the top of my head ...

 

- Thousands still waiting on the sidelines

- A rush out of paper assets into physical ones

- Interest rates below 3% for the next 5 years

- More falls in the stock market further destroying people's faith in any other investment but property for your pension

- The fact that BTL is a simple investment to understand and manage and it does pay a dividend. Borrowing money at one rate and renting out property at another, higher one is the trade - and it has been the model for banking for umpteen hundred years wit great success. It may not be as profitable as it once was, but it still works.

- Too much vested interest in property price appreciation at all levels of society , except for a few alienated savers, mostly in the 25-35 age bracket.

- 40 years of living in London and seeing what the market does, despite what it should do.

- The emotional attachment that people have to property.

 

Yes, the overall market could fall 30% over 3 years, but I'm not sure this constitutes a crash. And that won't happen to more desirable properties unless the price you measure the falls from is ridiculous.

 

Yes, London prices are out of kilter with earnings but they always seem to be . I remember thinking they were too expensive in 1994! And some Londoners earn a lot of money. They really do. And they earn more as each year passes. And they're happy to buy a property for two million and don't really care if it falls to 1.5 million because over a period of 5 years or whatever 500,000 doesn't really matter to them, as they will have earnt way more than that.

 

Yes, inflation doesn't matter if wages aren't rising. Yes, banks aren't lending. But fiat paper money loses its purchasing power as every year goes by and it's hard to justify holding it for extended periods.

 

Given the choice between houses and gold I'd choose gold. But given the choice between a house and govt. bonds, I'd choose a house. Between stocks and housing, I'm not sure.

 

Would I buy a house now? No. I think they'll be cheaper in a year or so. But a crash like 1989. I 'm doubtful. And even then desirable properties were still sought after. I'd like to see one. But I'm not sure we will.

 

Prechter, James Ferguson and all the other deflationists make utterly convincing arguments, and great newsletter writers, but follow their trades ... you miss out on booms.

 

And there's something about reading stuff on the net and spending too much time on your screens that turns you into a pessimist.

 

I'm in Balham. People want to live here. Property is selling.

[frizzers]

Actually, I've just spent 30 minutes reading HPC. Maybe we are doomed.

[drbubb]

Actually, I've just spent 30 minutes reading HPC. Maybe we are doomed.

Yes. HPC is now "loaded to the gills" with bearish postings, and quite a few anecdotal stories about price falls. All that is need now is a few more months of hard down price falls in Nationwide and Halifax and sentiment will get very grizzly. It could happen within the next 6-8 weeks.

 

I just made this contribution there myself:

 

I see that as being exactly the opposite - the elephant not in the room. First - people who 'invested' in BTL are not all leveraged up to the eyeballs. Secondly - their game plan is that the rent pays off the mortgage and, at the end of a mortgage term, they own the property outright - tenants having paid the mortgage for them.

 

In fact, they are the last people that are going to panic and sell when the market goes down. They may panic - but they will hang on for the market to go back up again - for as long as people pay the daft rents they ask. This is the BIG FACTOR - the rents they get. As long as they get the rent, they won't sell, in a panic or otherwise.

 

The massive BTL market is, as I see it, a bloody nuisance because it is a stabilising factor in the housing market.

BTL investors were saved by the ZIRP in late 2008. Without that, we would have seen a continuing crash and maybe a 30-35% drop by now, like in the US.

 

Now property buying demand has dried up again DESPITE low rates. Why? I think many people are worried about their jobs and sources of income, as austerity comes in. People do not want to take on huge mortgages, and the banks are tightening too. So the main buyers now are foreigners, who have "more secure" sources of income in their home countries.

 

I think you are right - watch rents. If they start falling, then the game is truly over for BTL. They market is behaving now like we may be headed into a crisis like that: falling rents, and a buyers strike.

[drbubb]

... what I am saying is that property is insanely over-valued and I am a harsh critic of that. I blame over-valued properties for all social problems. Yet at the same time I am starting to think we might be looking at a new paradigm here, frankly, and those expecting drops of 50% (me up to very recently) are going to be waiting a long, long time - and in the meantime how much money are you handing over to a landlord? Whatever you are handing over to the bank is at least helping you towards ownership of an asset, however shoddy...

I am now - as always - skeptical of talk of "new paradigms" being flouted as arguments to support bubbles.

(I also find it amazing how many people "throw in the towel" after waiting for years, just as a trend begins to change in their favor- that's why we hear things like: "The market turns when the last bear turns bull." A strange phenomenon,)

 

Austerity has hardly begun to bite - jobs and incomes will fall, as will state subsidies to renters. How can this NOT effect rental levels.

 

Austerity will also force people to economise by living with family and friends, reducing the overall demand for space, and reversing a long trend towards smaller households.

 

A change in trend will surprise people who produce forecasts like this one (from 2009):

 

/source: http://www.portillion.co.uk/news/?m=200906

 

Why the ongoing fall?

 

There was a big increase in 1-person and 2-person households, as the number of large households declined. Women found they could live alone, and divorce rates skyrocketted. Austerity and hard times, are likely to force people to live together, if only to save money.

 

Rising Incomes helped

 

... so did wealth transfers

 

In hard times, people will go back to living in less space

 

... and the overall demand for housing will decline, hitting rents, and prices too.

== == ==

 

HPC Rents down ? :: http://www.housepricecrash.co.uk/forum/ind...howtopic=151716

The hpc Space Poll :: http://www.housepricecrash.co.uk/forum/ind...howtopic=151719

[drbubb]

some nice simple social science DB

but how long do you see it playing out? myself, I am fearful it really is decadal, once you add in real IR and retirement cycle

Please see the many charts that I have added to my post on household size (above).

 

A change in the trend there may play out over a long time - a decade or more. People have about 3x as much space per person as they had in 1950.

 

We are spoiled, and don't even know it !

 

If hard times are really upon us, the best way to come with less income will be to share space, and there's a long, long way we can go in that direction. I see downsizing as a trend that is beginning now and will persist. Thank goodness, we have huge slack, and the whole country is massively long excess space compared to our grandparents.

 

Want to make a fortune? Find a smart way to bet on this trend. (Come to HK and see how people live here. It can be done.)

[Compounded]

Yes, London prices are out of kilter with earnings but they always seem to be . I remember thinking they were too expensive in 1994!

 

Interesting post which fits in with some of my friends seemingly unshakable confidence in houses as a safe investment because they "always have been".

 

Maybe 1994 was a bear trap, it looks a bit like it when houses are priced in gold.

 

If so and if bubbles take roughly the same amount of time to deflate as they took to form, the bottom could be two decades away.