Fundamental Analysis UK Housing Boom – Is the Party Over?

Recently the IMF said that the UK's property was overvalued and this could result in a spectacular slump. House prices in the US have slowed down considerably since 2005.

The UK avoided the Recession in 2001 when many countries went into deep recession. Post 9/11 the UK interest rates were at the lowest for many decades, this resulted in a boom in the UK housing market as the cost of mortgages was at its lowest. The low cost of borrowing also saw a boom in the buy to let market with many investors having a big portfolio of properties.

Not only was the UK government on a spending spree but also the UK consumer, due to the easy availability of credit. Currently the UK personal debt level has exceeded more than £1 trillion. It is expected that we could see a significant rise in insolvencies during 2008. The "time bomb" is ticking and could explode at any time; it could be triggered by any of the shocks to the economy. The Northern Rock fiasco was just the first such trigger, which resulted in savers withdrawing over £14 billion from the ailing Rock - no doubt the next 12 months we will witness more such triggers, which will dent overall consumer confidence. This could eventually lead to a big fall in the house prices.

Many "experts" feel that 2008 could see further rises in house prices, and some optimistic forecast has been put at over a 10% increase. Housing demand is influenced by the "feel good factor" resulting into the expectation that the house prices will continue to rise. Some of the reasons for a boom in house prices are;

• Cheap mortgage rates post 9/11
  
• Availability of easy credit
  
• Speculation of ongoing price increases
  
• Buy to let investors having large portfolio of properties
  
• Amateur investors now joining the buy to let bandwagon
  

The worrying part is when amateur investors join the party; it's likely that we may have seen the peak! One can see similarities with the technology stock boom of 2000. Many investors bought at the peak and after several years they have yet to recoup their losses.

The past year has seen many amateur investors venture into the buy to let market for the first time. This has meant that they have had to buy at the peak, with the mortgage rates almost doubling in the past 5 years.

Currently prices are being supported by the expectations that they will continue to rise, and when this increase fails to materialise the bubble could burst. The house price inflation has been at its fastest this decade as can be seen from the following graph; and since 1995 we have not seen a dip in prices, it has just gone up in one straight line!

In addition, there are other serious issues with the economy which could trigger a sharp correction, not only in house prices but also the stock market. Some of the disturbing triggers will be;</span />

• Lenders offering loans of up to 5 times multiples to salary, thus borrowers are overstretching themselves.</span />
  
• Increases in mortgage rates have yet to have an impact and often this takes time to react. The mortgage rates have nearly doubled since 2002.</span />
  
• Nearly 1 million Britons now own a second home, often as a buy to let investment. When the downturn in economy comes, panic is likely to set in amongst the buy to let investors, which would result in the market being flooded with house for sale.
  
• The US sub-prime mortgage crisis also poses more risks for the UK's banking system. In the US the crisis has lead to plunging property prices, creating a loss of consumer confidence with billions of dollars in loss.
  
• UK Job prospects are worsening, with many economist predicting unemployment to rise to 1.8 million+. The banking & financial sector has been a big driver for employment growth. Many firms in the housing market; this could result into deteriorating earnings and leading to staff cutbacks.
  
• Consumer spending could see a slow down when faced with deteriorating economic and job conditions. Once again this would affect consumer spending, thus lower earnings.
  
• Inflationary pressures are driven by high commodity prices, as demand from emerging economies like India and China continue to increase. This not only has an impact on the monetary policies like the interest rates but will have significant impact on earnings, which could lead to a big fall in stock market.
  

Buy-to-let bubble:
Is the party over? So far the landlords have had it easy, the cheap mortgage rates ensured that the rent covered the mortgage repayments and they benefited from the significant capital appreciation of their portfolio. It surely has been the best investment strategy for the past decade, as many investors have made fortunes and many have "retired" young.

Currently it is estimated that there are over a million buy to let mortgages, and landlords are now feeling the pinch. Past 2 years has seen significant rise in mortgage repayments and we are now seeing signs of price increase slowing down. The rents have not kept pace with outgoings, thus landlord profits have gone down. In some cases landlords are losing on their portfolio. Some areas in the UK have seen an oversupply of buy to let properties resulting into falling yields.

Although year on year prices rose by nearly 5% to December 2007, but the house prices fell for a second consecutive month in December according to Nationwide building society. New mortgages on a buy to let are also slowing, with many lenders now seeking up to 30% deposit and also a requirement that the rent on the property equates to 125% of monthly mortgage payment.

Unless the investor has a larger deposit the rental yield may be insufficient to cover the cost of the mortgage and with no expectations of a capital growth, you are likely to see significant drop in the buy-to-let mortgages. This could even result in many existing landlords starting to liquidate their portfolios. The only incentive to retain portfolios is the expectation of further capital gains. If this expectation evaporates and with falling yield, then there would be no point in buy to let investments.

Newer entrants to the buy to let market could soon face going into negative equity as soon as we start seeing declines in the prices. Furthermore, should the banks suffer to the extent of the housing bust, the fallout would be astronomical!

Changes to the Capital Gains could also contribute to the housing crash. The tax on property gains has been cut from 40% to 18% effective from 1st April 2008. So those investors who are sitting on fat profits would be tempted to lock in gains and also benefit from the lower tax.

Housing Repossessions
2007 has seen a significant rise in home repossessions, and it is expected that this figure will increase considerably in 2008. Rising property repossessions normally spell bad news for the property market creating a supply of houses, which are normally sold below market prices and this can dent confidence.

The Council of Mortgage Lenders (CML) has warned that the number of home repossessions is set to soar to levels not seen since the housing crash of the 1990s. It is also expected that there will be an increase in mortgage repayment arrears in the coming year.

Having said that, the current situation is very different from the 1990s. Firstly in the 90s interest rates were very high and peaked at 16%. We are probably unlikely to see huge scale cases of negative equity like we had in the 90s, due to the huge equity homeowners are sitting on at the moment.

What to do - Action Points?

• If you are a homeowner and if you are contemplating selling your home, then the time to act is now,given that sharp falls may just be round the corner unless the government can delay the inevitable by aggressive reduction of interest rates.
  
• Cash is king - with so much uncertainty, undoubtedly cash is king. Fixed interest and government bonds are increasingly becoming popular.
  
• Stock market investment - Although we have seen healthy gains in the markets worldwide, longer term it offers good opportunity. Many analysts are calling for sharp falls in the markets and this should provide a good opportunity of bargain hunting. Emerging markets should also offer a good opportunity in the event of a market correction.
  

Conclusion
Just as in year 2000, when we saw the NASDAQ stock market boom, we are now seeing some similarities - irrational exuberance in the housing market.

During the NASDAQ boom, we saw many amateur investors jump into the market at the peak, we are now experiencing a similar situation. Many amateur investors are jumping into the buy to let market.

As with all market activity, prices do not go up in one straight line and you will always have price retracement, the question is how big the retracement will be? There is no doubt that a significant house price correction is on the cards, the only question remains is when? It is a case of any one of the triggers to set in - as soon as the first domino falls, panic will set in resulting into significant declines in house prices.

 

[forker]

Don' want to fire up that old chestnut 'inflation/deflation' - incase Rothchild is lurking on the threads :cheesy: but given the extent of money sloshing around in the system I did think couple of years for it to feed in was not unreasonable. US lagging but their housing market considerably different to UK.

I had these discussions with our bond traders and the jury is out as to how this QE and billions translates into the the real economy. I'm yet to hear a plausible explanation. Some say it even has no bearing in which case what's all the fuss about. I'm none the wiser.

All I know is we've had billions thrown into the economy whilst output had dropped. Once all the dirt money comes out in the wash - inflation inevitably will rise in the absence of any corresponding increase in output or productivity.

I also did say we only have two options out of this mess - and only two.

1. Raise taxation to reduce aggrate demand
2. Keep interest rates low to stimulate investment

This is precisely the policy that is currently implemented.

I remember the 70s, 80s, 90s, 2000s like yesterday. Every ten years. Clock work. I doubt the 2010s will be any different. House prices will rise just as the sun will rise tomorrow.

We are at the cusp of a new wave - steady as she goes...

Interesting article http://www.marketwatch.com/story/the-biggest-qe-surprise-may-be-nothing-2010-11-02

i see where you going with the cyclical perspective and i agree to an extent. where i find myself in a different boat is credit or the lack thereof. People tend to forget that it was a credit bubble that burst. even though the market has deflated between 10-20% (depending on location), relative to the extent of inflation due to the easy credit it is minimal.

I recall seeing average working people give up work for the lucrative lifestyle of the property developer. buy a house for 200k, spend 50k shining it up, and then sell it for 50k profit or 20% based on a 250k investment. This cycle continued for years and there was a wave of tv shows , books, courses released. moreover, i recall seeing house prices often in the headlines and you only need to look at the historical chart to see the extent of the increase.

between 1959 and 2009 house prices has increased by 273% while earnings has only increased by 169%. If you look at the chart that shows the house price to earnings ratio, you can easily see how much of that has been achieved in last 10 years.

The days of easy credit is no more and what caused that super inflated divergence has yet to return to a level that is favourable to buyers. a if you were to calculate the deflation required in order to bring house prices back in line to affordable levels based on earnings and credit given, you would see prices dropping much further from current levels. Yes lenders are giving out mortgages, but unless you have a 25% deposit at the very least, you will be given a rate of 5-8% or more depending on where you look. Consider also that interest rates are currently very low.

you could argue that there is an increase in population and therefore the demand is higher. but you need to consider that he demand isn't driving house prices as i see it, mortgage rates and credit is. at present, demand is there but the goods to back it up aint.....

i do feel sorry for folks that recently purchased a property, they have a long wait until they see any return.

 

[anley]

i do feel sorry for folks that recently purchased a property, they have a long wait until they see any return.

But what if they were viewed property in the traditional sense, ie it's somewhere to live for them and their family. If it goes up then that's probably not such an advantage as all the house has done is matched property inflation.

But if it goes down, then so what, it's a home to live in first. Plus with negative price inflation if they want to move (espeically to a larger home) the new home will be cheaper and the loss will match the loss on their present property.

In either situations whether the property goes up or down in value is somewhat irrelevant for most people although most people still think the world will soon end if property doesn't go up year after year.

But as I've always said look at what ever increasing property prices did to the global economy? The whole world would be in a far better place right now, and with far stonger economic foundations, if prices over the last 10 years had increased by say 1-3% per annum.

 

[scose-no-doubt]

But what if they were viewed property in the traditional sense, ie it's somewhere to live for them and their family. If it goes up then that's probably not such an advantage as all the house has done is matched property inflation.

But if it goes down, then so what, it's a home to live in first. Plus with negative price inflation if they want to move (espeically to a larger home) the new home will be cheaper and the loss will match the loss on their present property.

In either situations whether the property goes up or down in value is somewhat irrelevant for most people although most people still think the world will soon end if property doesn't go up year after year.

But as I've always said look at what ever increasing property prices did to the global economy? The whole world would be in a far better place right now, and with far stonger economic foundations, if prices over the last 10 years had increased by say 1-3% per annum.

The problem to the owner isn't the value of the home but the mortgage repayments. Especially if you're on a buy to let and lower housing costs drive down rental yields. Devo'ed.

Also check this -

18th October http://www.thisismoney.co.uk/mortga...ticle.html?in_article_id=516646&in_page_id=57


28th October http://www.thisismoney.co.uk/mortga...ticle.html?in_article_id=517316&in_page_id=57

wtf

 

[Marwan2010]

If the article's forecast turns out correct then Gordon Brown will be finished. Couldn't happen to a nicer chap.

Gordon Brown................. A nicer Chap???
You must be joking!

It was his OVERSPENDING and Printing free money that has lead us into this sorry state!

 

[0007]

Gordon Brown................. A nicer Chap???
You must be joking!

It was his OVERSPENDING and Printing free money that has lead us into this sorry state!

...... I was of course waxing ironical.
GB makes estate agents, used car salesmen, boiler room conmen, and purveyors of duff trading courses look like saints.

Funny how we hear so little from Gordo these days!

 

[scose-no-doubt]

...... I was of course waxing ironical.
GB makes estate agents, used car salesmen, boiler room conmen, and purveyors of duff trading courses look like saints.

Funny how we hear so little from Gordo these days!

laying low after paying that hooker-maid to stitch up strauss k. gobbling up "consulting" fees from the wealth of various plcs no doubt.

 

[andycon]

Some of the reasons I don't believe house prices are going to go up Nationally;

1. Overall money supply, the securitised debt market is still virtually non existent and this accounted for 55% of money supply to the mortgage market prior to the credit crash. To attract money from depositors to lend they need to pay higher rates on there 5 year bonds which is difficult with BOE rate at 0.5%
2. Self Certified Lending, although not banned by the FSA just yet (rumoured to be soon) this is not being offered by any lenders. This not only takes out of the market a large proportion of the self employed who like to show a small income to HMRC. This takes out of the market a large number of employed people who had a high % of there total income based on commission or bonuses, it also takes out of the market all self employed and business owners without a minimum of 2 years accounts. It also traps in there current house all the people who previously borrowed under this scheme who are now unable to move house and stimulate the market.
3. Interest only mortgages - these are virtually unavailable for new loans, there are a large proportion of home owners on interest only mortgages as that was all they could afford due to house prices being so high in relation to incomes. Should these people wish to move they will have to have a repayment mortgage, even on today's low interest rates most of these people will not be bale to afford the house they have never mind upgrade so they are not going to contribute to the market.
4. Lending in to retirement - virtually non existent, unless people have a provable income in retirement that would support the loan then new mortgages have to cease at state retirement age. Include point 3 about no interest only mortgages and somebody aged 55 would have to have a 10 year repayment mortgage, even if the customer said yes they wanted one, the chances are the affordability calculations used by the lenders would not allow it. There is already a large problem with existing borrowers on interest only mortgages heading towards retirement with no pension provision other than that provided by the state, regardless of whether the customer can afford them these mortgages are due to be redeemed and there are no products to replace them. Lenders have the problem of forcing retired people to sell up (bad for publicity) or breaking the rules on responsible lending (again).
5. Affordability and loan to value %; Everybody is aware of the lower loan to values being lent, down from 130% to 90% and 85% at punitive interest rates and 75% to 80% if you want a decent rate. Lenders have also tightened affordability considerably, so a large number of borrowers are taken out of the market just on this basis alone.
6. Impaired credit - virtually unavailable, somebody with a CCJ for £550 5 years ago is unlikely to get a mortgage, anything more serious and you can forget it. Another segment of the market that prior to the crash were being catered for is gone.
7. Buy to Let - interest rates and fees punitive compared to what was on offer prior to the crash, loan to value down to 75% from 90%. Many late to the game portfolio landlords trapped with negative equity. Lenders took a large hit on repo's in this area. This is classed as commercial lending and lenders need 8x the amount on deposit for every £1 they lend compared to residential lending.

So even if there is renewed optimism for buying houses, and renewed optimism about unemployment and the economy and the customer wants to buy the house, they have paid of all there unsecured debt so they pass the affordability test, and they have saved the deposit or have the equity in there existing home, until they resolve some of the above points it is not going to happen to any degree. To resolve some of the above points would be classed as the irresponsible lending which got us in to this mess.

So I don't see it happening, but I would love to be wrong.

 

[scose-no-doubt]

tldr

 

[anley]

One of the problems about future house price growth is to do with simple maths and that's likely to mean property hardly rises at all over the next 50 years (apart from tracking inflation).

Ever read those stories (or listened to your parents) about how a house used to cost a pittance? How about a nice mews house in Notting Hill that cost £100,000 in 1985 that's now worth £2million+.

That's an increase of about 12% per annum (26 years), and it's a great return.

Now let's take that same house and project 12% forward over the next 26 years shall we?

The price comes in at £38,000,000 But be really quick if you want it because next year the price will have risen by £4,000,000 and the year after by £5,000,000 (only a small gain £9,000,000 in 2 years). Give it another 6 years and it will set you back £60,000,000.

Of course inflation over that time plays a role but inflation never compounds at 12% for decades.

So in order to afford that house (say 4 times salary) you'd need to be earning nearly £10,000,000 a year.

You see, small numbers can take big percentage increases no problem. But big numbers can't because they get too big too quick.

So for anyone thinking house prices only ever go up (over the long term) and do so at a great rate then I have 1 word for ya -

Compounding..............

Like I said, it's all to do with simple maths.

 

[scose-no-doubt]

While I agree that house prices will have to align with wages in principle, is it not possible that housing becomes a store of wealth that most people can't afford - like in the third world.
What if the new norm is based on capital appreciation coving borrowing costs rather than the current rental yield servicing debt payments?

 

[andycon]

While I agree that house prices will have to align with wages in principle, is it not possible that housing becomes a store of wealth that most people can't afford - like in the third world.
What if the new norm is based on capital appreciation coving borrowing costs rather than the current rental yield servicing debt payments?

Are you talking about residential property, commercial property or both?

For capital appreciation to cover borrowing costs as opposed to affordability of servicing the debt there would have to be a complete re-write of the FSA rules for residential mortgages. Prior to the crash lenders were mainly interested in capital appreciation covering borrowing costs. Current commercial lending decision making puts servicing the debt ahead of loan to value.

If housing became a store of wealth that most people couldn't afford wouldn't that limit the market and potential growth in the market?

 

[scose-no-doubt]

Are you talking about residential property, commercial property or both?
I'm just propositioning a scenario whereby property ownership is reserved for the rich leaving the rest to rent.

For capital appreciation to cover borrowing costs as opposed to affordability of servicing the debt there would have to be a complete re-write of the FSA rules for residential mortgages. Prior to the crash lenders were mainly interested in capital appreciation covering borrowing costs. Current commercial lending decision making puts servicing the debt ahead of loan to value.
Or just to get rich people interested as I said and add a bit of negative gearing legislation a lá Australia etc.

If housing became a store of wealth that most people couldn't afford wouldn't that limit the market and potential growth in the market?

Well there's the crux innit. Sustainability.

All extremely unlikely of course but a possibility, no?

 

[andycon]

All extremely unlikely of course but a possibility, no?

I think a very real possibility.

A big political theme worldwide for the last 30 years is that home ownership creates domestic stability, hence govt. desire to sell social housing and encouraging banks to lend to all. So it will stuff up that hypothesis as well.

 

[scose-no-doubt]

I was bored.

F9 to generate random digits innit dawgz if you didny know that already.

 

[Trader333]

Attila,

I am sure this will be of interest to you

House prices to rise 14pc to record highs by 2015


Paul

 

[Hoggums]

The only way this is going to happen is if RPI rises 30pc to record highs by 2015.

Interest rates cannot be lowered so there's no further stimulus available to the housing market and if prices can't increase currently with virtually no interest rates then once the rate rises come I cannot see how they can be sustained.

Until then I predict stalemate - with prices going pretty much nowhere unless recession #2 really starts to bite.

 

[Atilla]

Attila,

I am sure this will be of interest to you

House prices to rise 14pc to record highs by 2015


Paul

Cheers for the link Paul,

I do agree and not saying it because it suits my vested interests but purely because of fundamental economic analysis and 40 years history of house prices.


Right now the Arab Spring will be the rescue package Europe needs. The future is looking very rosy especially so if peace prevails in the ME.

Amount of pent up demand for houses, white goods and reconstruction is substantial.

Purchasing power in India and China as well as Latin America will bring bodies into Europe the favoured destination. These are likely to be the children of rich families in search of education and European life style...

Supply of housing is pretty inelastic and not likely to change soon.

Bovernment imho is right to consider opening up the green belt and relaxing some planning laws with some discretion to be applied - to reduce the cost of land.


I always think the Olympics not to mention the European football cup will bring out the cheerio factor in us all next year.


1. Inflation will prevail to pay off the debt in consequence to collosal injections.
2. Real interest rates will remain negative for some time to come.
3. Property is about the only real investment one has control over in these uncertain times.
4. If capital gains don't materialise the return on investment by letting will appreciate beyond the standard 6-7% for buy to lets so it's a no brainer to me that property is a good time to buy right now.

In fact best time was in Feb 2009 when the green shoots showed up. Like I said... :cheesy:

You pays your price and you takes your risk...


Time will tell...

 

[scose-no-doubt]

have to say I'm coming around to your way of thinking atilla. In the longer term.

 

[forker]

I would agree if i was privy to the % of investors relative to average Joe. The problem I have with the foreign investors theory is their proportional influence on the market. Added to that is the level of liquid funding because lets face it, lending ain't cheap

 

[Atilla]

I would agree if i was privy to the % of investors relative to average Joe. The problem I have with the foreign investors theory is their proportional influence on the market. Added to that is the level of liquid funding because lets face it, lending ain't cheap

Foreign aspect is to buy and rent. One person I know went to some university with fees of £16K p/a + London's living expenses. If he is one there must be 100s if not 1000s of others like him.

You've got to ask what will all the Indians and Chinese do with their money. Yes that's right go on holiday.

Like when the Brits bought Spanish property - started off as a trickle and in the end led to the Spanish responding with such quantity the bubble could not last. What drove the bubble in Spain you've got to ask? Was foreign purchases a factor?

Before it is taken out of context - not saying they will drive the market but they add to demand. Especially in Southern England and key university towns.


Addenda: There is a lot of slush cash swirling in the system. It is simply in the hands of those who are sitting on it waiting to unleash hyperinflation soon enough. We've been here before...