Navigation
Views
Toolbox
Evidence for a house price crash
Demand side
- Lack of first time buyers. These have been priced out and almost no-one can now afford a property on reasonable income multiples. The number of FTBs has dropped to its lowest level since 1980.
- FTBs have been replaced by Buy to lets. However. late-coming BTLs (about the last two years) could not achieve reasonable yields. They are to a large part or almost entirely relying on capital gains for their investment. Once property prices begin to stagnate, as they have already done, the supply of BTL investors will dry up, as without the prospect of capital appreciation, BTL is no longer a viable investment. The combined effect of 1. and 2. will be virtually no more buyers at all.
- The past boom has been fuelled by the availability of cheap credit. The combination of exceptionally low interest rates and loose lender practices combined have produced an unprecedented flow of credit into the market which has driven up prices. Without the availability of credit, demand would instantly evaporate at current prices. The supply of cheap credit will not continue for two reasons: a. Interest rates have already increased and will increase further, although possibly only slightly. b. From October this year, mortgage lending will come under FSA supervision, which has implications for lender's liability, among others. With this new regulatory burden and the fact that house prices are stagnating, lenders will tighten their lending criteria. The current loose self-cert practices will come to an end. Credit supply will reduce, dampening demand further. EDIT - tbe FSA supervision came into effect in October 2004, presumably the year of this article, and as of 2007 prices have not abated in response.
- Once prices start to sag, FTBs will not flood back into the market, as is widely predicted by the bulls. This did not happen during the last crash and there is no reason why it should happen now. Once prices stagnate/sag, the urgency to get onto the property ladder is removed. Buyers can delay their purchase and continue looking for their ideal house rather than buy in haste. Once prices start to fall more significantly, FTBs will be reluctant to buy for fear of further price falls and negative equity.
Supply Side
- BTLs with larger portfolios or who have bought earlier in the cycle and have large paper gains, will start liquidating some or all of their portfolio, once sentiment points to no further rises or falls. They will want to realise the massive paper gains they have achieved. I believe this process has already begun with lots of anectdotal evidence of "no chain" properties on the market.
- The amateur/late comer BTLs will not sell initially. They will hold out for longer, hoping for a swift recovery in the market. As prices slide further, those who operate on negative cash flow will ultimately be forced to sell, as they are crippled by the continuing negative cash flow with the prospect of property prices recovering diminishing and disappearing into the distant future. Many of them will choose personal bankruptcy as a way out of the overwhelming debt they face.
- The ordinary owner-occupiers will not sell en masse. Only FTBs that have come into the market late and who now realise that they are unable to service their mortgage, as initial fixed-rate and discount rate deals come to an end, will be forced sellers. This is often an argument cited against a crash. However, it does not matter what non-sellers do. The market will be determined by those who trade.
Conclusion
Overall, I believe that the lack of demand will drive prices down, as the BTL hype and the urge to get on the property ladder disappear. If there is a lack of demand, a significant increase of supply it is not required for a crash to happen. This is the fallacy of those who argue against a crash only from the supply side ("shortage of property", "people will not be forced to sell").
Bubble Pricker (Forum)