Friday, Apr 28, 2017

Does Two Months Indicate a Trend?

BBC News: House prices fell again in April, Nationwide says

UK house prices fell for the second month in a row during April, according to the Nationwide.
The building society said prices dropped 0.4% in April, and the annual rate of price growth slowed to 2.6%, the weakest pace for almost four years.

Posted by wdbeast @ 11:23 AM (6682 views) Add Comment


1. reticent said...

Prices aren't falling. They're just rising very slightly during spring, which, when seasonally adjusted, amounts to a fall. They actually fell in january and february but the falls were reported as rises, since the market is dead over the winter, so prices get seasonally adjusted up.

It would be good to have the 2008 NSA data for comparison, but I imagine it's quite hard to find those on the internet now as the indices are all saved in different locations. IIRC, the falls were much sharper though. The bottom completely fell out of the market. What we have now is more like a seller's strike, being met by an even more enthusiastic buyer's strike. Given that only an idiot would be buying a BTL now, I would expect that this stalemate will wear on so long as there is bad news in the economy.

But I'm not entirely convinced by how depressed demand is because so many people at my work are currently trying to buy (in London).

I think that whilst the Nationwide/Halifax indices represent a very good compromise between lead time and accuracy, you don't have a trend until you have 3 months of the 3-month-moving-average falling on an NSA basis.

So, no. Not yet. We'll see though. A stagnant spring would imply falls over the summer.

Sunday, April 30, 2017 07:27AM Report Comment

2. reticent said...

I will say this though. News that prices are falling travels fast and we are obviously not far off a trend of price falls. In any case, it is being reported as falling prices. The economic news has gotten worse as of the quarterly report this week.

As ever, in the wake of the BTL reforms, the question is: will they start selling? I don't think it will take much by way of falls to convince, say, 0.5% of BTL to sell up within a couple of months of each other. That's 12,500 flats hitting the market with no onward chain, enabling maybe 4 times as many sales. It's also not far off as many new build completions as you would expect in that time. That would lead to some serious falls and the BTL sell-off could snowball from there.

But processes like that are impossible to predict the scale of, as they rely on a chain reaction of events that is self-propagating, so how long it lasts or if it even ever gets going is very tough to call. So much of the initial push rests on how common the perception is that prices are falling. But then you could envisage something like:

-the ones who understand the nature of the market and foresee that what will happen when the financially stretched ones start to jump, will try to get out early prompting price falls in the region of 2-4%
-those whose financial plans couldn't accommodate many more falls get out while their retirement plans aren't jeopardised (ie those who have too much leverage, or were planning on deleveraging by selling off the lower yield properties soon anyway); prices fall 5-8%
-everybody else panics, and see the game for what it is: a prisoner's dilemma-style game in which the most optimal strategy for everyone is for everyone to hold their nerve, but the smart money is on screwing everyone else over. In any case, is the BTL sell-off the only reason for prices to fall? Is it in part to do with uncertainty about brexit? Why aren't there any hard data on how many foreigners are buying? etc.

But since the majority of the BTL brigade don't even understand how the tax reforms are going to hit them, and they don't fully come in for a few years, and even then only 21 months later when they do their self-assessment will the majority of them get that there's no yield anymore, this could all unfold so slowly that it never really gets going.

Nevertheless, I'm hopeful.

Sunday, April 30, 2017 08:23AM Report Comment

3. techieman said...

Hope "springs" eternal ?

Monday, May 1, 2017 09:17AM Report Comment

4. reticent said...

Eternal indeed. Falls never happen in this country. I autumn know better by now.


Monday, May 1, 2017 01:48PM Report Comment

5. techieman said...

Don't apologise... I started it!! :).

Anyway good analysis, but I do think the smart BTL money will conclude that the party is over and will start to sell off (regardless of their section 24 position).

However, on the other hand, those in early will probably not be too interested in crystallising a capital gain if they can maintain rental income, unless of course they are over-leveraged and not incorporated. I wonder if there is any kind of analysis on that , doubtful.

Monday, May 1, 2017 03:43PM Report Comment

6. reticent said...

I know but mine was woeful.

I think we've agreed a lot on this topic before.

Data on BTL is very hard to come by. The CML has only been gathering separate data quite recently (2006 maybe? maybe later) and they obviously don't have any data on cash sales which is where a lot of the action is (albeit concentrated in higher yield markets where houses are cheaper and you don't need leverage to get a decent return). Plus, you have to be a member/press to get the actual data as the press releases are very hodge-podge. About a year ago, I tried to gather some evidence that the average chain was getting shorter (to back up the idea that the growth of BTL has dampened liquidity) but gave up pretty swiftly. It took an hour just to cobble together a paltry amount of data on how many BTL mortgages there were in the years the CML was counting, based upon the press releases.

There seems to be tons of marketing stuff for accountants looking to help BTL incorporate, so they obviously think it's a growth market. I understand that it's not a cheap process as there are tax implications even though the effective ownership doesn't change. Before George Osborne cracked down on them, the Telegraph reported that of the 1-1.5m landlords, fewer than 500,000 mentioned any rental income as part of their self-assessment. I asked a few of the ones I knew at the time, and all admitted that they didn't with a chuckle, although they since have (motivated by the crackdown) and most are now looking into incorporation. Incorporation could have accounted for some of the discrepancy, since they would have been filing as company directors, but it's worth remembering that there were disincentives to incorporating beforehand, including access to BTL mortgages, which tended to have lower rates than secured business loans, increased accountancy fees that come with more paperwork etc. The vast majority of BTL only own one property and incorporating would have been overkill for anyone with less than 3, I would have thought.

All these landlords incorporating now are going to feel pretty stupid if HMRC keeps lowering the thresholds for ATED, which seems the next logical step. But maybe Hammond has put the brakes on for now, even if he hasn't reversed any of Osborne's BTL squeeze.

As for leverage, I'm told that it's been nigh-on impossible to get a BTL mortgage with less than 25% deposit for some time now, so I don't think that many of them are actually that leveraged, although I suppose they could be in areas that haven't seen much growth in the last few years.

I forgot to mention CGT which I suppose makes who will sell and what they will sell less clearcut, as you say. I guess they will be reluctant to sell the ones they've bought most recently, as there are so many costs involved in purchasing and I'm not sure you can deduct those from the CGT bill (surely not stamp duty anyway).

It's still all very ambiguous at this point, but I would say that the likelihood of a collective rush for the exits within the next year or 3 is increasing steadily. I haven't seen any mention of it anywhere, so I guess it will be a true black swan event when it happens, even though it'll be the bursting of a bubble involving speculative investment in property and it doesn't get more predictable than that.

Monday, May 1, 2017 06:06PM Report Comment

7. hpwatcher said...

I can honestly see UK government coming in with some-or-other policy to support the market; I'm not sure they have much of a choice.

Prices still insane in the areas that I have been watching.

Tuesday, May 2, 2017 08:46AM Report Comment

8. sneaker said...

I love it.

On House Price Crash, the bears have generally gone silent.

And any views about the possibility of a decline in prices are expressed with a huge amount of caution and only very qualified.


Anyone care to analyse all the fundamentals for demand and fundamentals for supply, and whether each one is impaired or strengthened?

It would be quite revealing, versus sentiment here.

Tuesday, May 2, 2017 11:45AM Report Comment

9. hpwatcher said...


It's an unfair question, as it's no longer about house prices, it's about central bank power. House prices are now pretty incidental.....

Normally there would have been a lovely recession and house price crash by now, but those days are over.

There will be a crash, but it will now have to be pervasive....everything will go.

Tuesday, May 2, 2017 02:22PM Report Comment

10. pete green said...

There was a crash - a crash in living standards, a crash in accommodation standards, a crash in public services - for the poor at least

Wednesday, May 3, 2017 07:41PM Report Comment

11. peppersauce said...

@pete green - well said

I wonder if the outcome of the next 2 years will curb the BoE's ability to write blank cheques to prop up the housing market and is a low wage/high rent economy the new reality for the poorer half of the nation.

Wednesday, May 3, 2017 09:36PM Report Comment

12. libertas said...

It will take a very significant collapse for btl to sell up unless if cash flow becomes an issue because, any gain from selling will be monkey hammered by capital gains tax. In reality, many are instead leasing their assets to companies who offer guaranteed rent and who in London are stacking homes full of.people. I am seeing a number of HMOs with upwards of fifteen people to an extended family home. Many of these people are foreign, often not European, I.e. Vulnerable illegal immigrants. This is what I am seeing in central London.

Thursday, May 4, 2017 03:31AM Report Comment

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