London-loser

Because although they will TELL you everything's fine, I'm buying etc... they aren't quite dumb enough to actually do it? In the same way that TTRTR insisted last December was absolutely the best time for US to buy but didn't actually buy himself. Or perhaps they are already as geared into the market as possible? Or perhaps they are going to wait until the numbers stack up again?

Not sure... but if we have we obviously didn't get very far. STRs do not support the market - they were consuming before they sold to rent and they are consuming after they STR. They provide no net new demand for property. This provides no net NEW support for the market... unless of course they are selling to a BTL who ignores the impact of their sale and only focuses on their demand to rent, ignores the yield and agrees to rent it back to them for less than the monthly cost of buying it... in which case there is some new support in the market and we are in a whole new paradigm (admittedly driven by people who believe that it is OK to buy a duff investment today in the hope that it will become a good investment tomorrow). Could this not be used as an argument for why they would not sell last time (many did of course) and why rental yields last time would have provided more support for the market? Could it not be argued that the (relative) ease with which people can STR today would increase selling rather than reduce it? As for the rest of your answer, it seems you do then agree that increasing unemployment is negative for the housing market as a whole (you just think it will affect other people rather than you).

It always really impresses me how totally certain property bulls seem to be that the rules of traditional investment just do not apply to property.

But surely it is only a bargain if you can rent it out? So back to my original question - do you really believe rising unemployment is not going to put downward pressure on house prices? Forgive my ignorance but if the UK goes into recession and/or a lot of poeple are made unemployed isn't it fairly obvious that this will put downwards pressure on rents regardless of what you choose to call yourself? In which case grabbing houses at current prices seems even less sensible than it does at present. I realise that your "Australian model" sees rental yields etc as a bit of a diversion rather the core of a BTL decision but unfortunately Britain (rather than just me/HPCers) remains ignorant to your great change.

Sorry TTRTR, are you seriously trying to suggest that rising unemployment is irrelevant to the housing market? Is this perhaps based on your Australian model where losing money on property is a good thing? Surely rising unemployment not only affects people's ability to pay their mortgage (possibly forcing them to sell) but also limits their ability to pay your rent rises. Or are we all going to live on the dole with all the rents paid by the government funded by those few of us who pay taxes?

I haven't seen this mentioned this morning but The Times is running an article today about: "Number of out of work increases for fourth month". It talks about how the last tiem this happened was during the recession in the early 1990s and fears that the UK jobs market is on the turn etc. This may not be any great shock as I think HPCers know that house price "corrections" tend to be followed (rather than preceded) by troubles in the jobs market. However, this makes the prop many soft landing theorists are relying heavily on much weaker than they hope. It all adds to the view that last June was the top of the market, when houses were priced for a perfection that was never sustainable (for example based on the past 51 quarters of economic growth rather than looking forward to whether 51 quarters of growth are ahead).

I couldn't believe my ears... whatever happened to renting is money down the drain? Or, indeed, smallpox in the water?

Something to steer WELL clear of, I'd say.

You might want to take a look at the graph in this thread: Housing stock to GDP

RICS May PDF

I find the idea of 5-6% annual falls as stagnation really quite interesting (if somewhat scary). Someone with a 75% LTV would see 20% of their equity wiped out for each 5% fall and could quickly get into difficulties with their lender (far from being ready to gear up again as some BTLs believe they will all do). I'm not sure it really matters THAT much about lending rules etc in relation to the 3.5 times earnings. I think this is more about what people can afford in the long term. The fact that someone will lend you £1 million doesn't make you more able to repay it (whereas the nation's economic growth levels does). And the much higher interest rates were accompanied by much higher inflation and so much faster income growth - the current low nominal interest rates have tricked people into believing they are richer than they are (since, I believe, people have accepted lower nominal interest rates but have not forecast what this means for the likelihood of inflation eroding their debt in the way it did for their parents). Both seem to me to offer temporary respite rather than the foundation for a permanent change. My view is rather a simple, boring one but I believe rises in the value of our housing stock (at the aggregate level) is driven by our economic growth rates. So it is not a coincidence that the UK's long-term annual economic growth rate is about 2.5% and the long-term real annual increase in the value of our property values is also about 2.5%. I believe this relationship is (roughly) translated into an average house price to incomes ratio of 3.5... and this relationship has not broken down, it has merely been temporarily abandoned (because of people's irrational focus on nominal interest rates and their willingness to borrow beyonf their means for as long as our lenders will let them). I think 10% interest rates would shatter their illusions... but it is not the only thing that will have that effect (rising unemployment, openly falling house prices, a credit crunch etc could all have similar effects). We might find some combination of these things has the same effect without the need for a single cataclysmic event to cause an overnight crash.

Again, I think the deregulated mortgage market and low nominal interest rates can explain how we got here... but not why this is a healthy sustainable position. I agree wage inflation is currently fairly high. I believe it has fallen back a bit recently and that the MPC has said it sees 4.5% annual wage inflation as consistent with its 2% CPI target. We may see 5% (on average) house price falls for several years accompanied by wage inflation of 4.5% or so to correct the overshoot. Four years or so of this would see the correction completed (roughly) by which time the average house price to incomes ratio will have fallen back to somewhere around 3.5 times. Although it seems the economy is weakening significantly and the 4.5% wage inflation might start to look optimistic... with more of the burden of correction therefore placed on price falls (or a longer period of correction). I think the 3.5 times earnings as a rough guide to house price valuations isn't that bad a guide (given this implicitly ties house prices to the nation's wealth). Some people argue it is higher today (Tim Congdon of Lombard Street Research for examples argues it is perhaps closer to 4). However, I find the idea that it is just not relevant anymore rather odd. The graph in the thread about the housing stock value and national wealth is quite illuminating. It shows the same boom/bust trend as the house prices to average incomes graph. This suggests either there has been a one-off, permanent, conscious decision by the UK public to spend more on its properties (and consequently less on everything else, relatively speaking) or there is a temporary euphoria that will follow the same boom/bust pattern it has done every time this has happened before. We COULD be in a new paradigm, I just don't see it. WHY do you think the 3.5 times earnings indicator is irrelevant unless we have 10% interest rates?

You can predict all you like RJG18, but the fact is that real estate is a GROWTH ASSET dependant on a growing economy that will always grow in value as long as the economy grows. With the UK such an attractive destination for immigrants, there is little prospect on the horizon of economic growth stalling. <{POST_SNAPBACK}> TTRTR, Capital Economics thinks rates will go so low precisely because the UK economy is not in a healthy state. This is why it also believes house prices will fall 20% or so. The state of the economy is not nearly as healthy as you suggest (no surprise given we've come off the top of a massively inflated housing market... and housing market corrections have always been associated with ensuing tough economic times). For example NIESR suggests UK economic growth has stagnated (not grown, stagnated), how would you see that as a recipe for a new round of above trend house price growth? I understand we see things differently but that looks to me like wishful thinking rather than an argument with any fundamental value behind it. Who is going to do all this buying to overcome the current oversupply and push prices up significantly again? And if it is BTLs, given the lower borrowing costs, who are they going to rent to as the economic backdrop gets tougher? Immigrants who will drive down average wage levels and pack themselves and their families into little flats? This seems quite a strange comment. We have gone from economic growth of about 3.5% (compared with a trend of 2.5%) very quickly to a period of well below trend economic growth (the last official figures I saw were downgraded to 0.5% for the first quarter with estimates of stagnation since). Real estate is indeed a growth asset, dependent on the economy. This is why people like myself feel something has gone seriously wrong in recent years (house prices have grown independently of the economy and, as you tell us, we appear to be in a new paradigm where house prices are no longer tied to our economic growth rates). My opinion, stated here before, is that property is in fact a "supercyclical" investment - with BOTH income and growth heavily geared into the state of the economy. It is fantastic in times of strong economic growth (as you have benefited very well from) and disastrous in times of recession. Don't make the fatal error of falling in love with one investment - especially not if it is a supercyclical and the economic winds are blowing in the wrong direction.

Hi Ed, Some interesting comments. You are problably right about experienced landlords but I suspect the experienced landlords are outnumbered these days by the amateurs. Sensible landlords may not have selling pressure (except that perhaps their experience might tell them we at the top of a bubble) but amateurs do - and prices are set by those that want/need to buy/sell rather than those who sit it out. I'm not sure owner occupiers should care that much (if they can get a discount on the property they move to). Inflation is very modestly below target (1.9% versus a 2% target). If rates are cut it will be because the economy is stalling not because we are 0.1% below the inflation target. A weaker economy might actually do the BTL business far more harm than the lack of an interest rate cut. I think you are a relative optimist around here. Hopefully, your opinion will be welcomed/debated though. I think the general view here is that prices (generally - you may be able to find odd places that stack up) have run so far ahead that there doesn't need to be some catastrophe to turn the market. Last summer the housing market was "priced for perfection". That perfection doesn't exist and prices are adjusting. The debate really seems to be about how far and how fast (incredible since last summer the consensus still seemed to be that it would not happen at all). My view is the change is BTL activity will be the main cause of a significant correction (I think a 40-50% correction in the house price to average earnings ratio is entirely possible - partly as a result of falling prices and partly as wages catch up). I'm not sure the market NEEDS BTLs to sell out to change things dramatically (although the last few NAEA surveys seem to suggest this is happening already). Someone needs to shore up the bottom rung. FTBs cannot afford to and it seems BTLs are no longer willing/able to. I suspect the rest will see nature take its course, although none of us really know how far and how fast it will fall. Again, I agree with you about the saving v spending points.

But surely this irrational behaviour (based on money illusion) is by definition not permanent? I could sell £10 notes for £5 each... until I haven't got any money left then my new paradigm comes a little unstuck.

In my humble opinion Smith's arguments really are very weak. I love the idea that mortgage deregulation in 1982 is a "recent" development that justifies today's high levels. Presumably this deregulation also justified the high house prices of 1989... and the subsequent collapse. As for interest rates, Smith's best argument is that there has been a permanent change in NOMINAL rates. I'm amazed that an economist would argue that the effect of "money illusion" is a permanent phenomenon.

A year ago the general view seemed to be that interest rates would need to hit double figures before things would get tough in the housing market. Today, rates of 4.75% have demonstrated that is not true. Personally I suspect rates do not need to hit 6.75% before things get VERY tough for the average BTL landlord. As for the deregulated credit. low nominal interest rates, I think this can explain how we got where we are... I'm not sure it explains why it is sustainable. My personal view is that all the easy buying has been done and the market still needs new buyers to sustain itself (the collapse in sales volumes suggests they are not there at current prices).

There are a lot of interesting/controversial comments on this thread. Firstly though I find it interesting that a correction of up to 20% in real-terms now constitutes a relatively soft landing - over three years, especially given we are already a year in and depending on what numbers you look at the correction hasn't started yet (I believe it has but others disagree). If inflation is going to struggle to take care of 7% of this that potentially means 13% capital losses over the next two years (6% down per year for the next two years?). It's not THAT soft a landing... especially if you are a landlord who is three/four/five times geared into the falls. I also find it very interesting how bulls look to rate cuts... but do not seem to want to look at WHY rates will be cut (for example the NIESR argues the UK's ecconomic growth "may have stagnated"). If this is the case I'm not at all sure that it is a great time to buy for BTLs (just after an apparent bubble peaks out and the economic slowdown that typically follows the start of a housing market correction gets under way). I'd have thought real terms corrections of 40% plus are entirely plausible (we've been there several times before). I agree about the savings view though.

Nice one. This shows what bulls.hit the arguments are that the number of women in work, the level of divorce, the number of singles etc explains high house price to income levels. When you take the aggregate level (as the graph shows) then either: 1) Britain has decided to permanently spend more of its wealth on property or 2) we are just at the top of the latest cycle of boom/bust (i.e. it isn't "all different this time", it is entirely the same).

Thanks TTRTR, Interesting comments as ever. My guess (I can only offer that) is that your "most interesting" place is suffering from the current market - it's not THAT difficult to get an offer (especially if you are willing to offer a healthy discount on a mickey mouse asking price... one that perhaps you've deliberately increased recently in preparation for low-ball offers) but it is much more difficult to get a completion. I'm sure owner-occupiers are more willing to make an emotional offer nearer the asking price, it's whether they can deliver that counts today. It sounds like you'd take a sensible approach to any sales. I'm just wondering whether you take the same sensible approach to calculating your equity, yield, gearing etc?

Hi TTRTR, It sounds like a nice idea... but is that the reality (or just what you want to tell yourself)? Up 5-10% since December? You really SHOULD have bought in December rather than worrying about loft conversions you could have done anytime. But are they REALLY up 5-10%? Or have asking prices risen? What someone can hang a property in an estate agent's window for is not the same as what it is worth - especially not today. And your new equity takes us back to another of my questions you never actually answered. Do you know what you could get for your properties if you needed to complete the deal within three months? Or do you know that you'd be able to have your properties looking pretty in estate agents' windows for higher asking prices? I would have thought it is quite difficult to get a (realistic) idea of what extra equity you have gained in the last six months given the state of the current market (with the low transaction volumes etc). Obviously a top-notch property professional would take a much more cautious approach than merely adding a fictional 5-10% and then going to make a cup of coffee.

That is BS & you know it. I said 6-9 months ago to you (have you deleted it from memory as usual?) that IMO Australia was ripe to crash while the UK was fairly valued for the most part. You may remember I asked you which market you thought was most likely to go? And which market is definitely going? Yes, that's me, right again! You would be doing yourself a favour by listening to me a bit more. <{POST_SNAPBACK}> That was AGES ago mate. I asked again much more recently than that (perhaps you didn't see it - it was during your "guerilla days" when you only seemed to appear long enough to taunt people rather than debate anything). But it is good you admit your beacon is in fact "going". Incidentally, I seem to remember I said "both" (I think you were still in the "December was the best time to get a bargain and you missed it" mode). You ought to listen to me a bit more mate.

That is an impressively daft thing to have said. I only hope you didn't pay him for that pearl of wisdom.

Hi TTRTR, Thanks for your answer. I would have thought that if December was the best time to buy you would have bought then and looked to do your loft conversions now? No matter, my guess is the market "got it all wrong" and has helped you to be able to get at least as good a deal this summer/winter as you would have got last winter (I'm confident I personally can get a far better deal today than I could have done last winter). I'd agree that prices should adjust to the Sipps changes (when the facts change I change my mind etc). But I just don't see the tax giveaway as the "large incentive" needed to push the market up significantly (as you state as FACT). Don't get me wrong, it is an impressive tax break for the limited number of people able to take advantage (I think I banged on somewhere on this site about how amazed I am that a Labour government would make such a tax concession to the wealthy at the expense of the rest of society). But it really isn't nearly big enough to have any dramatic impact on the overall market. Unless you want to point out the important details I have overlooked?

Well, if you are looking for something that will lose you less than £8k a year (on the income side) then I think you have succeeded. Congratulations. However, Aussies' thinking seems a bit different to British thinking on property - perhaps because Aussies know so much better than us Brits... or is it because the Aussies believe it is a good use of taxpayers' money to pay landlords to lose money on their properties? Sounds fugged up to me... but I'm a backward Brit. How is the Aussie market doing these days anyway? The last time I asked (given you held the Aussie market up as a beacon for the UK) you failed to answer. To find out the rent and answers to my questions I'd have to care. You brought it here as evidence that house prices cannot crash, I merely highlighted a couple of missing details in your analysis that make it impossible to comment on whether it is or isn't a good deal (which I would have thought would be necessary before you could use it as evidence that properties will not crash). YOU can fill in the details or not as you choose. However, I'm impressed that you know you are right without minor details like whether they are single or double bedrooms etc. And the Sipps answer?