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House Price Crash Forum


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Everything posted by LuckyOne

  1. I have a theory. The average house price is the present value of GBP 1,000 per month over 25 years discounted at the Base Rate + 100 bps. People care about payments and not prices at their peril. Base Rate Present Value 0% GBP 265k 1% GBP 236k 2% GBP 211k 5% GBP 155k 7% GBP 130k 10% GBP 102k
  2. https://www.theguardian.com/money/blog/2017/nov/18/house-prices-land-prices-cheaper-homes The essential point is that residential land is worth about 100 times the value of agricultural land. As the planning process is the mechanism by which land use is reclassified, why should the increase in value go to owners upon reclassification rather than to society which gives planning permission and causes the increase in value?
  3. I think that they key indicator to watch is the velocity of money. https://fred.stlouisfed.org/series/M2V Monetary authorities have tried to counteract the collapsing velocity (flow) by pumping up the supply (stock) to maintain overall activity. https://tradingeconomics.com/united-states/money-supply-m2 At some point, the velocity of money will pick up and all hell will break loose. It feels like we are reaching an inflection point but I have been wrong about the timing for a while now. I think that history will look back at the last decade very unkindly. Monetary authorities have forced people further and further out the risk curve to generate yield. It is the ultimate mis selling in my book.
  4. It is a bit of a tricky question to answer. I describe BC and FL as having a high quantity of life while the UK has a high quality of life. There are things that I really miss about the UK, especially socially. We have lived all over the place and I know that there is no such thing as perfection and that the best that we can do is look for the "least worst". The housing markets are not homogeneous across either BC or FL. We are not in (or within commuting distance of) Vancouver or Miami with their attendant issues. In the parts where we live, our son could afford a modest, single family first home on his salary alone but wants a larger deposit before he buys. HIs job also requires some mobility early in his career and he is aware of transaction costs. Our naturalised British, Oxbridge educated daughter and her English Oxbridge educated partner would have to pay 9x their household income to buy their 2 bed lower ground floor flat with a very modest garden south of the river in Zone 3 that they currently rent at a sub 3% gross yield. My take on it is that there is a 25% downside risk where we live and at least a 50% downside risk where our daughter lives. Both of our home markets have peaked. The absolute amount of money at risk is another factor. Both of our homes together cost less than 50% of the single home that we rented in the Home Counties. We are happy where we are for now. If and when grandkids come along and if our daughter stays in the UK, we might rethink where and how we live. I know that I have been very lucky in the way that my life has turned out hence my user name. I am willing to attribute a lot to luck rather than to skill.
  5. I still pop in every now and again. We left the UK in 2015 after renting and waiting for a decade for house prices to get to a reasonable level. Our daughter still lives in London and we visit a couple of times a year. My current thinking is that the PV of GBP 1,000 a month for 30 years at 0% is GBP 360,000. The PV of GBP 1,000 a month for 30 years at 7.5% is GBP 143,018. A monthly payment of GBP 2,517 a month at 7.5% has a PV of GBP 360,000. Prices don't matter, cashflow does. Rental yields have collapsed because people can't afford more rent. People can pay current prices because interest rates are artificially low giving a low mortgage payment for a given price. Rates will rise to a more normal RPI + 3% in the future and push prices lower. A further distortion of cashflow is the tax haven status of the UK for non-doms. This has to change at some point. I look at buying a house as being similar to buying a 30 year bond with very high transaction costs. It is not something that I am interested in doing in the UK at current rates. I expect that my daughter will be able to buy a home in the UK at a more reasonable price in the next 5 years. Her current home has a gross rental yield of 3% which is unsustainable. At a yield of RPI + 3%, the price would drop by nearly 50%. The house of cards will collapse at some point, probably when rates rise.
  6. I am surprised that the BIS know so little about the mechanics of FX swaps and forwards and cross currency swaps. If one party to the transaction defaults at any time before maturity, the bankruptcy claim is for the net mark to market value of the contracts and not the gross amounts. If one party defaults on the maturity date of the contract, there is a settlement risk that the surviving party makes the payment in one currency and doesn't receive the payment due in the other currency. In this instance, the authors are correct if the surviving party is not vigilant about settlement risk. Many of these types of contract are margined (typically cash or government securities) above a threshold amount with a minimum transfer amount so even the mark to market value is relatively well secured. There are lots of things to be afraid of. This is not one of them.
  7. The irony is that the last court of appeal is the European Court of Justice.
  8. I have been giving IP a bit of thought lately. This is what got me to thinking about it : IP is taking up an increasing share of total capital. It is very difficult to participate in the "production" of IP. It is even more difficult to acquire it. I think that the growth in the relative value of IP is a contributing factor to increasing inequality. In the long run, we are going to have to face up to the fact that there are more people than good jobs and that some form of Citizen's Income is going to have to come into play. This will be very expensive and is a "down the road" discussion. As Osborne is on such a roll, I think that he should consider disallowing the deductibility of offshore transfer payments for IP "rental" in the short term as a possible long term revenue source. This is one of the reasons that the offshore subsidiaries of large global conglomerates like Starbucks, Apple, Amazon etc pay very little tax in the UK (and elsewhere). I am a believer in property rights. I do not believe that the owners of intellectual property have the right to unilaterally declare the jurisdiction in which it resides. I think that a reasonable approach is to say that it is deployed globally in rough proportion to their sales by country rather than 100% in Ireland, Malta, Luxembourg, Lichtenstein, Malta, Bermuda, Barbados etc. Disallowing the tax deductibility of offshore IP transfer payments will have the effect of allocating its deployment globally in rough proportion to sales. In some ways, this is analogous to the way that Osborne has treated the deductibility of BTL mortgage interest. The deductibility of offshore IP transfer payments disadvantages purely domestic businesses competing in the same field. I believe in free markets. A distortion like this is not capitalism or free market behaviour. It is also more logical (obviously in my opinion) than the "turnover tax" solution that has been proposed and is easier to defend. To be successful, this would most likely need to be agreed to by the G7 first (members are universally negatively impacted by the problem, including the US which sees a lot of stranded cash from their conglomerates sitting in low tax jurisdictions invested in financial instruments rather than being re-deployed in business activity), then by the G20 and then by the OECD. The only people who would complain are the aforementioned Ireland, Malta, Luxembourg, Lichtenstein, Malta, Bermuda, Barbados etc and the global owners of IP who are getting a huge tax break by making a unilateral jurisdictional declaration that they have no right to make. I have recently left the UK but I am a British citizen and a registered voter. Have I got anything wrong that I need to correct before sending it off to my MP who happens to be a Cabinet Minister? It is a bit technical to explain and it will need at least a couple of edits but I think that many would see it as being completely fair if the Government could work out the details and reduce the opportunities for global conglomerates to game the system.
  9. The other problem that we have is that net additional government borrowing each year is definitionally part that year's GDP. When borrowing is reduced or halted in a subsequent year, either because of policy or because of markets, GDP falls by definition absent increased tax collections. The Krugmanite argument (Austrian in good times and Keynesian in bad times) is that states should increase borrowing during recessions to keep GDP constant. In my view, this is a tautology and not a policy at all. If we were to believe that debt is just a claim on future output, our national accounts would be better served by subtracting net additional borrowing in each year in GDP calculations rather than including it. This would make the original Keynesian policy easier to follow as governments would be seen to be doing well if they paid down debt in good years and would have a buffer to deal with bad years. Keynes' argument was that the business cycle was inevitable and that saving in good times gives firepower in bad times.
  10. Throughout history, reliance on vendor financing has eventually harmed the vendor and not the purchaser. I agree with your identification of the problem. I also think that a full fiscal union won't politically palatable. Germany could be clever in a EUR exit strategy. They could have German owners of German government debt (roughly EUR 2.24 trillion in total) have their debt converted in DEM upon exit while non Germans keep their debt denominated in EUR. As long as foreign ownership of German government debt is more than roughly 22% of total debt, this will be a good offset of the Target 2 balance of roughly EUR 550 billion.
  11. There are only two options for Germany in the medium term : Leave the Euro Agree to a full fiscal union A cost of entering into a monetary union and not a fiscal union has already been incurred by Germany. The nature of the cost is all that remains to be determined. If they leave, the cost will be a 20% to 40% reduction in their net Target 2 balance in DEM terms as well as a more difficult export environment due to a strong DEM. If they stay, they will have to allocate an additional 5% to 10% of GDP to fiscal transfers within Europe. If Germany and the UK were smart, in my opinion, they would change the nature of the current net fiscal transfers and allocate them all to general revenues in poorer countries rather than to specific projects. This would increase sovereignty, reduce the overhead of the EU, ease the fiscal burden in poorer countries, probably reduce waste as national governments don't need to "invent" projects to get funding and could be politically palatable as they aren't asking their electorates for any more money for "Europe". The risk is that they lay bare exactly how much they are already spending which raises the ire of their electorates. I think that the net result would be to delay the inevitable as it would create a partial fiscal union by reallocating existing funding.
  12. http://www.theguardian.com/politics/2015/jul/21/george-osborne-launch-spending-review-asset-sales I assume that all of the land being sold will count as brownfield sites, so relatively easy to develop.
  13. The BIM45700 "regime" is something that I didn't know about. It just makes the problem even worse for those with larger debts and income who have been aggressive in the past which is where I believe that the pain was meant to be felt.
  14. It is the only way for the Euro to survive. Another option is to have a strong EuroA and a weak EuroB, perhaps with some sort of promotion / relegation framework.
  15. The first column represents after tax net cash flow before the budget and after the budget. The second column represents the after tax net cash flow before the budget and after the budget with a 2% increase in rates. I think that I have already shown what you are asking for. The reality is that higher marginal rate BTL landlords can be in a negative cash flow position after tax post the budget even if they are in a positive cash flow position pretax due to the differential between the tax rate paid on (rents - non interest expenses) for a 40% or 45% taxpayer and the tax "earned back" on interest expenses which is now fixed at 20%.
  16. The squeeze started at the high end in 2012 and 2014 with the ATED, CGT and SDLT changes. The tax treatment of mortgage expenses is now going to put the squeeze on the lower end. It is now obvious that the assault on one front was able to be withstood. I think that the market will struggle to withstand the opening of a second front. I think that the change was actually very clever in its execution. The "casual" BTL owner who owns 1 to 3 extra homes won't be hit that hard. The "serial" BTL owner who owns 5+ in addition to having a day job will be hit much harder. The number of "casuals" is high but they don't own that many homes on a relative basis. The number of "serials" is low but they own a lot of homes on a relative basis. The change won't be that noticeable until rates start to rise. The 4 year adjustment period lets the new rules become "normal" before they really bite when rates rise. The implicit assumption by Osborne in his execution is that rates won't rise that much in the next few years so there is not much political risk to losing the "casuals" as voters. The "serials" might be lost but they are more likely to not vote than they are to vote for the Reds, Oranges or Greens.
  17. I took a quick stab at the arithmetic making a couple of heroic assumptions including static rents even if rates rise and that the BTL landlord is in the 40% tax bracket. I don't think that these are too heroic as I believe that rents are based on a % of people's after tax income and not priced as a % of landlords' costs. I have left out the impact of the cessation of the 10% wear and tear allowance. It only makes things worse for landlords and wasn't necessary to prove the point. I have also treated the mortgage as IO to make the arithmetic easier and to reflect the fact that most amateur landlords are in it for capital gains and not income. Things do not look pretty unless I have made a mistake. As others have pointed out, waiting for capital gains is all well and good if cashflow is positive. If cashflows become negative, the ability to "hang on" becomes very difficult. A simple 2% rise in interest rates makes things almost unmanageable for many amateurs. As someone has already said, if you are going to panic, panic first. People have asked about the catalyst for an adjustment to "normal" prices which are about 50% of current prices by my metrics. This could be it. My daughter might actually be able to afford a home by the time she is 30 (she is 24 now). Property Cost £2,000,000.00 £2,000,000.00 Gross Yield 4.00% 4.00% Rent £80,000.00 £80,000.00 Non Interest Expens £12,000.00 £12,000.00 LTV 75.00% 75.00% IO Mortgage £1,500,000.00 £1,500,000.00 IO Mortgage Rate 3.50% 5.50% IO Mortgage Expense £52,500.00 £82,500.00 Pre Budget After Tax Cashflow Rent £80,000.00 £80,000.00 NIE £12,000.00 £12,000.00 Mortgage Expense £52,500.00 £82,500.00 Taxes @ 40% £6,200.00 £0.00 After Tax Cashflow £9,300.00 -£14,500.00 Post Budget After Tax Cashflow Rent £80,000.00 £80,000.00 NIE £12,000.00 £12,000.00 Taxes at 40% £27,200.00 £27,200.00 Mortgage Expense £52,500.00 £82,500.00 Mortgage Relief @ 20% £10,500.00 £16,500.00 After Tax Cashflow -£1,200.00 -£25,200.00
  18. The rise in the share of total capital held by owners of intellectual property which is very narrowly held probably contributes more to the problems identified in the OP than globalisation.
  19. Globalisation has raised the living standards of those in Chindia and Africa faster and far more effectively than all aid programs in history combined in my opinion.
  20. The Guardian fact checked the claim and seem to accept that he is about right. http://www.theguardian.com/news/reality-check/2015/jun/17/reality-check-uk-global-welfare-spend-george-osborne
  21. There are two separate metrics. The first is the price relative to income. The second is the price per square meter. Canada is very expensive relative to income but still not so bad per square meter : http://www.globalpropertyguide.com/most-expensive-cities Global "hot money" is buying in places where prices look cheap per square meter which is making things even worse for locals where valuations were stretched relative to incomes. Because rent is local and paid from income while prices are set by a combination of local and global money and are paid from a combination of capital and debt, rental yields are low in places like Canada as locals are being driven out of ownership by offshore money. Full disclosure : I moved back to Canada over the winter.
  22. I try as much as I can to reduce the impact of the elites on my life in my choices as to where I live, how I shop, the amount and types of energy I consume etc. The elites mostly have the power that we have given them or allow them to take with with threats of putting us in jail.
  23. I don't care about inequality within nations or across nations nearly as much as I care about the absolute standard of living of the bottom quartile of the world's population.
  24. I see can understand the argument in the OP from a very narrow, nationalistic perspective. Taking a broader perspective, I think that globalisation is actually a net positive for the world's population. It has done more to lift people out of poverty than any national or supranational program / policy. It has weakened the influence of statists and nationalists which I see as a good thing. It has reduced the impact of the "lucky sperm" problem where someone born in the UK has a much better likelihood of a positive life's outcome than someone born in India. There is still a lot of progress to be made. The problem of the "race to the bottom" is a transitional one. We will reach the bottom at some point after which the entire world's population will have a much more equal chance to achieve good outcomes than they do to-day. At the crux of the argument in the OP is that someone born in the UK "deserves" a better life than someone born in Bangladesh. I reject this notion outright.
  25. I would propose a different solution. People ahead of cows inside the M25.
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