London-loser

You have a very sensible Mum there me2.

I wouldn't hold your breath. The Nationwide UK figure was £153,743 for August 2004 and £158,348 at the end of July 2005. It needs to fall by more than 2.91% in August to go negative (compared with -0.36% last August). It could happen but I doubt it. The Sept 2004 (and Nov 2004) figures were much the same - so a similar fall by the end of September/November would see YoY negative. The data is here: Nationwide UK Monthly Data

My boss has been trying to convince me to take on a fat mortgage for quite some time. He always seems a bit uncomfortable about how easy it would be to just fug off if I don't like the job anymore.

Firstly, buying a bad investment today on the basis that it will be a good investment one day is not very bright. Secondly, they are making the rather grand assumption that they will never be forced to sell within the next 25 years. The more you gear up your risks (with max mortgages, interest only etc) the more you become a hostage to fortune and the greater the chances are that this will prove a very expensively incorrect assumption. They seem to be assuming they will ALWAYS have tenants etc but should they suffer void periods somewhere along the line they might find their high gearing levels do not give them the luxury of holding out for the long term. Recently, for example, it was discussed on this forum how Bradford & Bingley reported a significant spike in the number of BTL properties they had repossessed. I'm willing to bet you none of those BTL landlords who got repossessed thought it would ever happen to them. I'll bet they were sure they'd just ride it out and win over the longer term. Smart investors measure risk and return and trade them off, looking to invest when the potential returns massively outweight the risks (1995 rather than 2005). Dumb investors buy after the event when the risks massively outweigh the potential returns... and then just tell themselves it will all turn out alright in the end. Don't get me wrong, it IS possible to do extremely well out of what they plan... I just think this really is not the time.

Your post highlights precisely why people here think BTLs (at least newbie/amateur BTLs) will get "carried out" when things turn nasty. Your friends are taking the maximum mortgage possible, on interest only, so that they can buy other places that are max-mortgaged on interest only... Essentially, they are taking the maximum possible risk in the housing market. If the market soars ahead they will be laughing about the fortunes they will have made. However, if it falls all of the risk they have taken on comes back to haunt them. If house prices crash (let say falls of 20% nominal) then these guys will most likely be in negative equity across their entire portfolios and may get repossessed (still leaving them in debt after the dust has settled). Basically, they had better be right that prices aren't going down!

I take it to mean four bedroom places sell for the previous price of three beds, three bed places sell for what two beds used to fetch etc.

You're Up North, I hope this doesn't sound too condescending but perhaps I can offer you a little lesson in statistics - don't worry, it is free. When you are looking at a time series of data you need to interpret the data very cautiously when the level of the data plunges suddenly. So, for example, if you are looking at 100 observations each month and then suddenly the number of observations drops to 50 you need to be wary about the conclusions you draw on that data (since it is CLEARLY not directly comparable). Secondly, if you are looking at data that can vary widely from one observation point to another you need to be careful how you interpret that data. So, for example, if you were lumping all "detached" houses in an area together you need to be very careful how you interpret this information. I can point you to detached houses in my area that sell for £750k or £7.5 million and obviously which one sells is going to have a major impact on raw average sales prices. The moral of this story is that you should be very careful how you interpret wide-ranging data, especially when the level of data coming through the pipeline has collapsed. Indeed, if you were to take a "non-mentalist" approach, to use professional jargon, you might immediately move away from what the actual data tells you and start asking WHY so little data has suddenly started to arrive. This might actually tell you a great deal more than the raw numbers. So, for example, if you were to find that the data level has collapsed because so much less of the product in question is selling, while at the same time the amount of supply available is increasing, then you might be able to get a much better picture of what is actually happening than by just looking at the numbers (which have perhaps started to paint an unreliable picture).

Forgive me if I'm being thick here but didn't I see the Land Registry numbers posted on this forum that showed Q2 2005 figures were down on the Q3 2004 figures for the big picture (UK as a whole?). Most people here argue the market peaked last summer... and few people doubt the LR numbers are a lagging indicator - so obviously they shouldn't peak until later. And I agree that we need to be very aware of how each set of data is constructed (so crude average sales prices, like the LR numbers, can be heavily affected by the level of type of sales actually completing). I'd also be wary of housing market stats generally in a stalling market - if there are lots of properties not selling (and therefore not correctly reflected in most of the datasets) then the picture quickly becomes very blurred.

That's true... there is a leasehold on a studio flat in my street available at only £120k (5% deposit and a little more than a four-and-a-half times mortgage and it could be our dentist's new home).

It's all very simple... in the first statement he was talking about you, in the second he was talking about other people. I'd say this is an advanced state of denial - from someone who can accept there is a problem generally but still cannot quite accept that there is a problem for them directly.

Hi Othello, I think you are right that, unfortunately, all of these side effects are fairly likely to accompany a house price crash. I don't think any (well, not many) HPC regulars wish this on people. But the problem is that we have got ourselves (here I mean the UK as a whole) into a real pickle and I think the HPC (with these uncomfortable side effects) is actually desirable... to get the UK back onto the "straight and narrow" and away from an economy sustained by debt (i.e. borrowed from the future) etc. The HPC would merely correct an unpleasant side effect of loose credit and human greed. I'd like to say that "if I wanted to get there, I wouldn't start from here" but it doesn't help much. Oh, by the way... don't kill your missus, she didn't do anything wrong, that Iago's a liar etc, etc...

Mervyn King has to write "an open letter" to Gordon Brown to explain how he stacked things so badly if CPI inflation exceeds 3%. We can assume he will not want to do that (it's not good for the Bank's hard-won reputation, let alone morale). Mervyn's job is to get CPI inflation to 2%... with anything below 2% seen as being as bad as anything above 2%. The BOE estimates interest rate changes take 18-24 months to take effect so they look this far ahead when they set rates (I believe they feel it is nearer 18 months than 24 these days). This COULD be seen as, with hindsight, a demonstration that interest rates were TOO LOW 18 months ago - although nobody really believes the MPC can accurately predict what will happen that far out (for example oil prices hikes, war etc). It was also not helped by Gordy's decision to switch inflation target (RPIX is 2.4% and pretty much in line with the 2.5% target of two years ago). However, it seems reasonable to assume the MPC will take a cautious approach to any further movements in interest rates now.

Sorry, wrong thread. I thought this one was back onto the subject of Burberry thongs on eBay. I'll leave you to it... I've got bids to place.

The real irony is that the more EAs helped push up the market, the more easy profit seemed to be on the table, the more people were encouraged into the business... and the more EAs there are scrapping for the reduced business that remains.

Hmm, Not entirely sure what to make of this. The rate of growth of the BTL market has clearly slowed since last year. But it is still growing at a reasonable pace.

Which will be fine as long as 450,000 less homes come up for sale... unfortunately it seems more property is coming up for sale than new customers to buy it each month... a recipe for... stagnation, surely? Bad news for a high street over-supplied with estate agents though. Couldn't happen to a nicer bunch.

OK, six months after starting this thread there is some concrete news. A property has appeared on nethouseprices - the first reported sale of this type of property (two bed, two bath) this year in the three streets I monitor very closely (I live in one and the other two are pretty much identical - new build etc). This property apparently sold for £210k in June 2005. The last one sold in June 2004 for £207k. So that tells me there was roughly a 1% gain - I'm surprised at that but the problem is one house sale doesn't say that much about the market as a whole (except perhaps it ain't moving... but that's no secret). Is this another idiot suckered in or proof that things are "stagnating"? I can't quite tell if the one that sold is the one that originally came to the market with a £225k asking price, then cut to £215k then apparently sold (it eventually disappeared from findaproperty etc). It is not EXACTLY the same address as the EA gave me but close enough (possibly an EA typo etc?). If it is that one 0 I think it is - that is a 6%+ discount on the original asking price and just 2% on the second asking price. As for the others? The £240k one is now reduced to £230k (no surprise), the £220k ones seem to have gone back up to £225k and the £200k one has disappeared altogether (taken off the market after a year by fed-up seller?). Still three or so essentially identical places up for sale in a market that seems to move one a year. Now, will buyers up their offers or sellers reduce their prices? I know where my bet is and I'll keep this thread updated.

Has just seen a flat like his in his old block go up for sale with an asking price £6k (3% or so) less than he sold for in 2003. If the average discount these days is 6.5% or so that suggests the selling price is likely to be around 10% or so less than two years ago (and presumably a bigger discount to summer 2004 prices).

Nickd, When you say "shifted" do you mean taken off the market, offered on, sold STC, completed or what? The problem in my area is that so little seems to be "shifting" it is hard to draw inferences from anything other than asking prices, number of properties for sale etc. You seem to suggest a property selling after six months on the market is now "normal". This is roughly where we are at, but it is not normal - you probably can sell if you are willing to hold on long enough but that is not the sign of a healthy market (especially if more properties are coming to the market than new buyers). I agree that BTLs are the key... but I think they have to KEEP BUYING (rather than merely not sell) for the stagnation theory to work out for anything other than a fairly short period. The BTLs have priced out FTBs at the bottom of the market, to the extent that they have become the bottom of the market. If they do not buy at the bottom then chains stall further up. Either BTLs need to fuel the bottom rung of the chains or everyone needs to start to accept that the market is set to dry up and the stagnant house price becomes just the number in the estate agent's window rather than what you can actually get for your house. I suspect (I don't know) that we have roughly reached a point where FTBs are starting to become needed once again as the foundation of the market... unfortunately they can't pay the prices BTLs did.

Little Guy, I agree that it seems our views are not THAT far apart. I'm not suggesting theeconomy is on its last legs... but certainly weaker than many people thought (including myself). The impression I get (and it is just that) is that the consumer has been given a wake up call. As far as I can tell the main reason people are fairly sanguine about the economy is that they believe consumers will start spending again (with a little kick-start from late week's rate cut). I suspect they will think about their debts and whether they want to run up more. My point though is really that house prices as of last summer were "priced for perfection". At that time our economy was growing healthily (even if it was debt-financed - essentially borrowed from the future) and everyone was pretty bullish (OK, interest rates were going up from very low levels but I don't think the impact had really been felt yet). What I'm saying is that years of strong economic growth were already "priced in" (I'm sure you heard all the VIs saying how unemployment was at an all-time low etc - the point is they believed it was going to stay there). I think even people acknowledging the economy is not strong (without needing to believe we are about to hit recession) will be sufficient to weaken the housing market quite considerably. I think the real test is not in what the Halifax, Land Registry reports etc... these are all providing partial data, obscured and skewed by lack of deals going ahead and rarely reflect the supply/demand imbalance on the ground. It is what the people on the ground do that really matters - there ARE much more properties up for sale without people to buy them at current prices. Will they be taken off the market? Will they just stay on the market at the same price for a long time with transactions down and supply much greater than demand for a protracted period? Will vendors accept they have to cut their prices? Or will buyers decide they can pay these prices after all? My bet is on vendors (I mean those that actually want to sell, not just kite-flyers) cutting prices before buyers increasing what they will offer... largely because the simple fact is most buyers CANNOT buy at current prices while most sellers CAN sell (and pass the cut up the chain or accept a smaller actual profit rather than a larger theoretical one). Any continued economic slowdown just increases this pressure. I think we are still to some extent in a stand-off phase but it seems that without a significant boost to the economy there is only one real solution to the stand-off (and all of this assumes no "shock" occurs - war with Iran, another petrol spike - in which case all bets are off). Sorry... another rant.

Little Guy, I think it has been said several times on this site that the "crash" will not happen overnight - as has been said on this thread most people here seem to think it will take several years to bottom out. So perhaps we are agreed that prices won't be 30% cheaper when the weekend is over. And I think much of this argument depends on how you define a "house price crash" (you may argue, for example, that 20-30% nominal falls over 3-4 years is not a "crash"). I think I posted on your last thread - you didn't respond (perhaps because of your PC crash) - that to me the fact that the UK economy couldn't cope with 5% interest rates is a fairly sure sign that the economy is not very strong AT ALL. I expected (with others, perhaps Charlie as you suggest?) that rates would go over 5%... but I now know that I had significantly over-estimated the strength of our economy, as witnessed by the need for a rate cut last week (with GDP growth revised down to 1.7% etc). I'm not at all sure our economy is "reasonably healthy", given it seems to be massively reliant on debt-fuelled consumption at present. As for the June mortgage approvals getting up to 96,000 - the long-run monthly average over the last 20 years - I hope we can agree June SHOULD be one of the better months for mortgage approvals (in a clearly highly seasonal market). So, we know that the "good" month's figure is in line with the average over 20 years... but we also know it SHOULD be higher than the average (given the clear seasonality in the housing market). We can clearly conclude that June 2005 was A BAD JUNE - not a bad month overall but a bad month if the seasonality is considered (rather than just a simplistic view that considers all months to be equal). This troubles me since in your last thread you told us mortgage approvals had risen back to "normal" and said you knew someone on another site somewhere who had demonstrated it. Now you seem to present evidence to contradict that evidence. Far from being "normal" you seem to have presented evidence to demonstrate that June's numbers were BELOW normal... that seems to make sense to me (it's a subdued market after all). We also know transaction levels are down (25-30% on last year) while supply of property is UP (perhaps 25-30% on last year). This clearly points to problems (and leads assorted vested interests to accept it remains "a buyer's market"). As for price fall etc it is a little difficult given this fall in transactions and increase in supply. I can say clearly that I have seen properties near me drop their asking prices by 15% or more. I can't demonstrate categorically that the price has fallen since, despite the 15% drop, they still have not sold (so Land Registry, nethouseprices, Nationwide etc etc) do not reflect this. The average discount has also widened over the period so it seems clear to me prices are down significantly... however, you could argue the original price was only a joke and the REAL price hasn't fallen at all... obviously I can't disprove this. My point to this rant is that things are a lot less rosy than you care to paint.

In that case, the answer seems to be that your friends have devalued the cost of debt - because someone will allow them to get themselves massively into debt they think they should take the opportunity.

By the sounds of it, you are in an unusual position - presumably with wealthy friends on high salaries. If you consider an average London flat (leasehold, one/two bed) and consider 5% deposits and "old economy" income multiples - 3.25 times for a single person or 2.5 times a joint income then it quickly becomes plain to see that prices are out of kilter. Sure, there will always be people willing/able to buy, but that is not reason enough to draw inferences that prices are acceptable or sustainable. If an average London property is £240k (ish) and the average London salary is £45k (ish) it seems fairly clear there is an issue. The 3.25 times single earnings = £145k (ish) which supports a £155k (ish) property... which is some way short of the average property price. The 2.5 times joint = £112k (ish), which supports a £120k (ish) property. Bulls will find all kinds of reasons why prices are not ridiculously high (these multiples are no longer relevant, more debt is available today etc), it's up to you to decide whether they make sense or not. I think not, so I'm renting rather than buying but ultimately it is your call (and your friends' call).

Hmm, That might be vaguely reasonable if the amount of correction needed was just 15%. Depending on who you ask the figure is more like 50%, which then requires stagnation fro seven/eight/ten years (depending on the level of inflation). The stagnation argument requires everything to go smoothly for a LOOONG period of time, with no nasty shocks along the way - the likelihood is that it will not happen. Stagflation, by contrast, also assumes interest rates will not rise - we'll have no growth and lots of inflation for an extended period without interest rate rises. Personally, I find even the thought of this much more depressing than a short,sharp shock.

You can understand why I can't quite bring myself to go in for a chat with my local estate agent, Mr Brilliant, can't you?