RJG18

I have to agree. I remember when I first thought I was really in a position to look at buying a house, about 4 years ago. I was aged 21, earning about £22,000 a year. In the town in Sussex that I was looking at, the two bed terrace houses were on the market for between £79,000 - £89,000 and we just out of my reach. I remember at the time thinking "This is madness. I can't afford these little houses, and most of the people I know in my age group earn half what I earn. This can't last much longer." Now, after a spell of pretty good luck I earn nearly £60,000 at the age of 25. but the same terraces I was looking at 4 years ago are now often on the market for £189,000 - £199,000. There "greater fool" priciple is now all that has been propping this all up. When it collapses it's likely to undershoot the prices 3 or 4 years ago, which were unaffordable to most people then too. So what would that mean.... these example properties falling from £199,000 to £69,000 (65% fall). Looks perfectly feasible, even 'likely', now to me.

BBB> Ok, I'll accept that, although I still think it's a bit odd that you started telling us about your £70k property with £700pcm rent, and then only revealled you were talking about two properties as if they were one when pushed on it. However, your unemployed tenent is having to "top-up" his housing benefit rent in order for you to even make aprofit on a £35,000 property. In many places (like South East) the equivilent LA properties are currently selling for over £140,000. On such a property a typical mortgage (Interest Only) would be £750-£850 per month, and over £1000 for capital repayment. You're going to need to rent this property for over £1000pcm to make a real profit. If the LA are paying £300-400 in housing benefit, then is the unemployed tenent going to be able to top up the rest of the rent to the tune of £600-700 a month out of their own pocket? Or is it possible that (in the highest priced area) the prices of these properties at the "least desirable" end of the spectrum are goung to need to fall by 70% to be able to retain tenent demand? I'm not suggesting anything, just working with the numbers as they stand.

What will hopefully happen now is we'll get some nice negative headlines in the tabloids based on the RM report. They won't be able to resist it. It will only take one chav-rag to publish a front page headline along the lines of "Property crash in Full Swing! .... Pirces fall by upto 10% in a month in some boroughs!" Then the real panic will set in.

Hmm... Average London property price fell £13,000 in one month. I hope all the speculators who were sitting around counting their paper profits each month when the market was rising, and extrapolating the figures over 12 months or more and thinking they were rich are now extrapolating these rates of losses in the same way. It's only fair. Those who were saying "I'm gaining £5,000 a month on my property! So in a year that will be £6000!", are hopefully now saying "I'm losing £13,000 a month on my property! That's £156,000 a year". If the current values of monthly falls in London were to be sustained for a year then London property prices will have crashed by nearly 53% by this time next year. And we all know how much "new-paradigm speculators" love extrapolating trends....

BBB>"i actually prefer housing benefit tenants to working people." But BBB, most local authorities (and all of them by the end of this year I believe) set a mximum cap on the amount of housing benefit they will pay towards the rental of a property. They will not pay an unemployed person £700pcm to rent a £35,000 property. In an area like, for example Middlesborough, the local authority will pay housing benefit of around £250-300 a month to a tenent to rent a £35k flat or terrace. Where do/are your unemployed tenents find/going to find the extra £400-500 a month they need to pay you out of their own pockets to make up the difference if they unemployed. I'm assuming you must be operating in authority areas where housing benefit is currently less capped. You might be in for a shock when the new housing act is introduced later this year and the current patchy limits on housing benefit of nationally more standardised. If you feel something moving beneif your feet, looking down, it might be a rug subjected to some pulling....

TTRTR:>"BTL is supplying a demand that exists as in any decent economy, there's nothing immoral about it. " I don't accept that, simply on the basis that property is not and open or free market, hence BTL activity can cause severe hardships. In an open market if a products price become over inflated beyond it's fundamental value, another supplier will enter the market with an equivilent product at a lower price, undercutting the overpriced suppler, and taking away their market share. This market economics ensures that prices of things remain affordable. This cannot happen with property, prices can go up and up and up on speculation (with no-one able, or willing, to enter the market and undercut them), before crashing and spiralling all the way back down again. Housing is essential. Image if this happen with other essential supplies, bread? water? If waelthier people bought up all the bread supplies, restricting them from poorer people and artificially pushing the price up, making huge profits, and using these huge profits to continue to buy bread at ever higher prices, to charge the rest of the population ever more for it, until only the very wealthiest could afford to buy bread, and there was no demand left in the market, then the whole lot came crashing back down. You couldn't argue that this scenario was "supplying a demand", and we wouldn't accept it. So why accept it as "supplying a demand" with property. "So let them eat cake." (and before anyone points out that bread is not comparable to property, and you cannot invesnt in it as it is in now way a persistant asset.... I am aware of this, it's just painting an example).

Sledgehead: Just picking up your point about how "reposession-happy" the lenders are likely to be in a falling market if you're in negative equity. I fully agree. And for those of you (particularly the BTL's, who are more likely to have this) who don'y believe it will actually affect you, take a look a the terms and conditions you have a agreed to in your mortgage contract. Many of you (and more so thatn in the 80's I'm lead to believe) will find some from of negative equity shortfall clause, or similar. This is likely to state that in the event you go into negative equity and the value of your property is no-longer sufficient to secure the loan on it then you must either pay back the bank the entire value of the loan on demand to the bank, or take out an unsecured "top-up" loan to secure the bank against the shortfall. This happened to quite a few people in the 80's crash, and is likely to happen again. As Sledgehead says, the banks are going to start getting itchy trigger fingers. Does anyone know how common such clauses are in current mortgages, I would be interested to see some figures. An IFA told me recently it is now more common than it was in the late 80's for the bank to include such precautions. Scared yet?

Eek, I'd agree with this sentiment (and, I shudder to say, with BBB) if it wasn't for the fact he is STILL buying, right now, highly geared, at the top of the market and near the bottom of the interest rate cycle. If he had bought sustainably (and his earlier purchases may have been) then he would simply be a professional landlord. Professional landlords are not a fad, they have been around pretty much forever, and will continue to be. They're not part of the boom. It's certainly a living. However, right now if he is sinking as much of his boom equity-growth into gearing up to buy more overpriced properties as often as possible (he's mentioned 25 every few month) then this is not sustainable. Buyingr overpriced properties, highly geared, will lead to negative rental yields when the market corrects, although he may be having trouble spotting this if his higher (earlier) yields are subsidising this significantly - however this still doesn't make it good business. BBB seems somehow (and I'm not saying he's lying, but I can't myself explain how he's doing it) seems to be avoiding the ever decreasing yields that his scenrio in this kind of market should lead to. Indeed, most BTL's have seen yields falling the more recently they buy properties, has the higher purchase price to relatively low rental income (not helped by risinginterest rates) makes the yields ever less attractive. BBB says that he can buy a £35k property (not sure where on earth you can find that these days), and, what was it, get a £700pcm rent on it. Very impressive of you can. I can't find anywhere else in the rental market (let alone the current market right here today) where you could possibly get that kind of return. In this area (sourth east) £700pcm rent is generally paid on properties valued at at least £200-250k, not £35k (even if there were any). I'm just saying, that if BBB is correct with his figures, then don't take them as the norm of this industry, you won't find those numbers anywhere else.

And we should point out that 3 Trillion of Assets (mainly property) is only worth 3 Trillion if you can find someone to seel them to at that price. Having higher Assets than debt is meant to be relatively save because you can liquidise your assets to clear the debt and remain safe. For example, say you have a £6000 car and a £2000 debt. If you get into difficulty with that debt, you can sell the car for £6000, clear the £2000 debt with the money, and still have enough to buy a slightly cheaper £4000 car if you so wish. However, where assets prices have been funded by their own price growth (i.e. with property) there is no way to sell the asset to clear the total debt. I.e. if we ALL have trouble servicing our debts then we can't simply sell our £3 Trillion of property, pay off our £1 Trillion of debt and walk away safe with £2 Trillion. this is because the current £3 Trillion of property value is funded by it's own growth, and does not actually hold that fundamental value. The only way "someone" could buy the £3 Trillion of property from us to clear our £1 Trillion debt would be to take out more debt pay for the £3 Trillion of property. I.e. For us to sell our £3 Trillion of property to each-other to clear our debt, we would all need to borrow a further £3 Trillion to buy eachothers property off eachother. Net result would be: Current Debt = £1tn, Current Property Assets = £3tn, -- Borrow a further £3 Trillion -- Current position now Debt = £4tn, assets = £3tn -- Sell property to "eachother" for £3tn (paying with the borrowed money) --- -- Use proceeds to clear the original £1tn of debt -- End position: Debt = £3tn, Assets = £3tn. There is no way that nationally our £3tn of property can safely secure our £1tn of borrowing on an over-valued asset like this. Any attempt to clear the debt buy liquidising the assets can only have the net result of increasing the total debt (it's what you get when the current "value" of an asset has been reached by self-fuelling price growth, to outstrip it's fundamental value).

I believe BBB's current business setup goes something like this: - He bought lucky (early-mid 90's) with his first property, for his own residencial purposes. - After a few years he'd paid off all (or a large part of his mortgage), which in combination with modest property rpice recovery towards the end of the decade saw him with considerable equity in this first property. - He believed that this had occurred through his "sound logic" and "careful judgement". - He then released a fair amount of this equity (probably around 4 years ago), to put down as the desposits on some more BTL property, maybe, say 10-15% deposits on interest only? - The property boom continued and he found himself with more and more equity in his BTL properties, allowing him to remortgage it to raise the desposits to purchase even more property. -He continues this cycle several times over throughout the boom, eventually owning around £1m of property (maybe 20-30 properties), all with what on face value looks like about 20:1 geating, except for the fact that in each case the equity/deposit is actually raised on debt from the previous property. The whole thing is actually nest like a stack of russion dolls, and it all boils down to gearing well in excess of 99:1. - Now, what BBB sees is that to service the debt on these properties cosrs him, say, an average of £300 on each property, and he gets gross rental income of say £500 per property. Providing him with, say, £200 x 30 = £6000 a month of income which lets him feel very rich, buy a Mercedes Benz, and mobile phone with lots of ring tones and clip-on covers and thingies, and most importantly feel wealthy, and that he's got a successful business. - Unfortunately, his business model is entirely dependent on massive and unsustainable capital growth occurring in property prices, and ignoring any fundamental calculations about the wealth of his business. His debt to asset ratio is actually huge, as is his ratio of debt to profit. No "real" business could possibly function sustainably like this.

You can't determine the true value of an asset (over ANY period of time) simply as "the price you paid for it". Otherwise you could fully justify borrowing ANY amount of money to buy ANYTHING at ANY price, and always show a Debt to Assets ration of 1:1. For example, if you borrow £50,000 to buy some "magic beans" from me for £50,000, then you could always argue that your economic health was very good, as while you had £50,000 of debt you also held £50,000 of assets. The difference is that asset prices can (and always have done in the past) go up as well as down. When you overpay for an asset in a boom/bubble then when the price falls your ratio of Debt to Assets will rise alarmingly. Will all lemmings please swallow their "Asset-to-Debt Ratio" placebo pill, then stop asking questions and go back to watching Linda Barker laying laiminate flooring on the tele (ooh, ooh, you could do that too). ALL IS WELL!

Madness. If base rates reach 6.0% then she would be paying nearly £1100 a month in mortgage repayments on that mortgage. Earning £25k a year would give her a monthly take-home salary of around £1450. After he mortgage payment this would leave her £350 a month. Out of this she would need to pay each month around: £120 council tax £150 utilities bills £50 in contents/building insurance/etc ...leaving her..... £30 a month (or £7 a week), to buy food, clothing, run a car, make telephone calls, have a social life, pay a TV licence, etc, etc, etc. If the £25,000 deposit is reapyable to her parents (assume over 10 years @ 0% interest) then she owes them £208 a month. Even if she offsets some of these costs by renting out a room this girl is facing financial ruin for the rest of her life. There should be a law allowing anyone involved in peddling Loc-x3 to be put in prison.

With regard to the pent-up "Backlog" of potential FTBs piling into a falling market and bouying it up to some extent; while I agree that as prices become affordable again a higher proportion of FTBs will come back into the market, but will there be enough to replace the now (or at least previous) rampant speculative buyers who will desert a falling market? I suspect not. The amount of property transacted as FTB (and people unable to move further up the ladder) return to the market and speculators leave, will approach a more historically "normal" and sustainable level. However, this demand is likely to be somewhat lower than it would natuarally be due to several factors: - Some prospective buyers sitting it out, waiting to see "how low can it go" before buying; - Some prospective buyers still unable to afford to buy even into a falling market as prices will still be too high for them (don't forget, the average house would need to fall by a total of about 52% before it became "affordable" again to persons on an average income); - With tigher lending criteria (and likely higher interest rates) it will become increasingly harder to secure a mortgage (compared to current standards of lending), or at least to a secure a mortgage of a particulalrly high value. Based on the above, I do not believe that the demand from current prospective buyers into a falling market could be high enough to match or outstrip supply. It may create sufficient "friction" to prevent an out and out freefall, but certainly could not create high-level pricing stability and certainly not upward pressure on prices (at least not until the bottom of the bust part of the cycle).

>"What am I missing? " What you are missing is the 62% of HO feel unhappy because the value of their prized asset has fallen. Although this may not actually materially affect them, they will still not be happy with this paper loss wiping out their paper-gains. They will also spend less and borrow less when this "feel good factor" is gone, causing damage to the economy. However, remember that many of the 62% HO's WILL be materially affected as many has remortgages/equity-released and will find that either their cheap supply of future money released from the high equity in their home has suddently diminished, or worse will find they have negative equity because they have re-mortgaged so much equity out of their house. Only then will they wake up and realise that what they had been doing was "borrowing huge sums of money secured on their home" and NOT "releasing/spending their profits". Many will not be in much better a situation than some of the FTBs.

BBB, You can't say that the inability of someone to afford a place to live is their own fault for not earning above average salary. It's like saying the only way for everyone to be able to afford a house is for them to earn an "above average salary". If we all earned "above average salaries" then whatever nominal value you are thinking of would be definition no-longer be the average salary. The average salary would just be a higher number. This kind of thinking is very symptomatic of the "New Property Investor" mentality that you sometimes see, along the lines of: "We can all be millionaires". Just like: "We can all earn 'above average' salaries if we put our minds to it". By simply increasing the nominal amounts of everyones income (i.e. putting more money into circulation) then all we would be doing is creating pure inflation. The purchasing power of that money to buy anything would be proportionately reduced (whether you are trying to buy houses, bread, beer, or whatever). But, more importantly, we would significantly devalue our currency, which in international finance terms is certainly not a desirable thing - hence the bank of Englands prime remit to keep inflation low by raising interest rates *almost* at all other costs. I agree that some (even many) students waste their tme at university, or don't learn anything useful and waste a lot of money, but you can't generalise as you have done. You are actually trying to say that the way to create a more prosperous economy for our country is through lower levels of education, training and skill amongst our workforce. Instead, you believe the correct choice, the way to prosperity for our economy an for our country is to encourage young people to buy as much property as they can at as young an age as possible, in favour of aquiring education, knowledge or skill. This does not work. The end result of your New Paradigm would be a civilisation that is going backwards. Few or no people with any skills earned through higher education (Doctors, Nurses, Architects, Engineers, Computer Specialists, Scienctists, etc). We would lose (or never gain) the ability to heal the sick, progress the knowledge of mankind, cure cancer, build great engineering achievements like bridges, tunnels, railways, develop greater technologies, works of art. Instead, you would have us sitting around, uneducated, endlessly exchanging an ever-aging tired old stock of houses with each-other, for stupidly high (and now meanigless) nominal value of currency, surrounded by the trappings and environment of the dark ages. Just extending this to it's logical conclusion. It's your argument mate, not mine. I'm just joining all the dots for you....

TheLittleGuy: I see in your post above you are still using the "Strong Employment" argment to support house prices (to a degree). There are two reasons why I don't see this working: 1) It's not about the NUMBER of people who are employed, but rather how much they earn. It doesn't matter if more people are employed now than previously, if they money they are earning is not sufficient to either buy property or service the new generation of high rents that would be needed to support current prices. In both cases the average property would cost more than 100% of the average persons takehome salary to service either a mortgage or rent on the average property. Also, I should point out, that if everyones income (and consequently, the average income) was to rise to a level where they could service these property prices, then such a rise would of course be inflationary (in it's purest form). Increasing nominal amounts of money into circulation and devaluing the purchasing power of that money. This would of course force heavy increase in interest rates to attempt to control that inflation (leading to even heavier reduction of prices, since property purchase is generally leveraged). 2) You have used the "Current High Employment Levels" argument to support the stability of the current strong spending in the economy (specifically: property prices). But, what so many people fail to acknowledge with this argument, is that high employments is not the CAUSE orf high levels of consumer debt and consumer spending (including on property), but it is the CONSEQUENCE of the higher borrowing and higher spending. The more people spend, the more demand there is for products and services, hence the more people need to be employed in order to build/provide/sell/etc the higher volumes of products and services. Because high levels of employment are the consequence of this, not the root cause, as inflationary pressures rise, higher interest rates (or simply too much debt - even taken at relatively stable low interest rates) will reduce the amount of spending that is possible, and hence will reduce the requirement for such high levels of employment. High levels of employment can NEVER really be a root cause to support and argument for property price strength (whether it be price rises, or high price stagnation).

Ok, I've found my lemming while staying with relatives recently (this is just like "Show'n'Tell at school, isn't it). I asked them their opinion, and sure enough they don't believe price rises will be as strong as previously, but believe slow growth/stagnation is now what will happen indefinitely. They also believe that price falls or a crash are a complete impossibility. (note - they also acknowledged that they were aware of the existence of the previous 1980's and 1970's crashes but thought it was different this time). I was interested by this answer, so asked my sample lemming what their reasoning was for their currently held beliefs. Their reasoning was that: "People have been predicting a crash for a couple of years now, and it never occurred, therefore those people are wrong." I'm starting to believe that the vast vast majority of the population fall into the lemming category, and us people who bother to think these things through are very rare indeed.

But property is currently "sticking" all over the country, as the market turns. People now seem to be either unwilling or unable (a combination of both) to pay current prices. Thinking up a new method to value property at even higher prices is not going to make people willing or able to pay them.

I odn't think 3% a year is in any way extreme, although I'm sure some Bulls would argue that even 3% a year was "pie in the sky" thinking. Yet, amazingly, these same people are perfectly happy to accept that prices can rise by over 2% a MONTH. If, in a bubble, prices can rise by 2% a month then they can certainly fall by 2% a month. (which translates to a fall of just under 20% a year).

Just done the calculation for the flat I'm currently renting in Mid Sussex. A similar flat in this street sold for £150,000. I'm currently paying £350 pcm in rent. A typical mortgage on this flat would now cost £945 per month (or £725 on interest only). That means that it is 2.7x more expensive to buy this flat at current prices. However, landlord is not currently making a loss as it was originally purchased years ago, probably was value at around £40-50k in the mid/late 90's. We've been renting it for quite a few years now, and the rent has not really gone up that much over that time. If the rent HAD gone up at the same rate as property prices we would now be having to find about £1200-1300 a month in rental payments, for a 2 bed flat! Obviously not affordable to most. Hence, rental prices remain grounded by affordability.

Excellent post BT, and well explained. However, I don't think it's *quite* as clear cut as you put it (rental prices represent reality, and purchaseprices don't), but it's pretty close. Rental price levels are affected by two main elements (in order of importance): 1) Afordability 2) Supply/Demand Levels This is basically saying that increases in supply or decreasing in demand can bring rental prices down, whereas increased demand (population growth or shortage of stock) and shortage of supply can push prices up. However, critically, in the rental market these prices can never stary much outside the window of affordability. People can only afford to pay rental amounts that their income (and other costs of living) can support. Purchase property price is different, I believe it to be affect by the following factors, in order of importance: 1) Credit Lending Levels by Banks (including interest rates levels) 2) Market Sentiment 3) Affordability 4) Supply/Demand This is saying that as long as the banks are willing to lend people lost of money to pay for property, then people will us that money to buy it! This has far less grounding on "affordability" than rental prices have. People are preared to borrow more than they can afford to actually realistically or comfortably repay. I have also placed "Market Sentiment" above "affordability" since, as long as people see prices rising then true affordability is less of a concern to them. Whether we are talking about FTB's spending huge proportions of takehome income servicing mortgage repayments, or BTL investors with low/negative yields subsidising tenents, as long as they see prices rising then such affordability issues are of less concern to them, and they can always mentally offset the unaffordable costs with their perceived capital profits. This is a key element of "Interest Only" mortgage buyers, who have no realistic way of actually paying off their capital, but are still counting their massive capital gains. So from the above we can see that Rental prices are more "Real" because they are not directly affected by Market Sentiment or Mortgage Lending Levels (although they are of course heavily indirectly affected). They are governed by Supply/Demand and Affordability, the ture "Fundamentals" that affect the true values of any asset or commodity in a capitalist society. Seniment and Lending Levels, as we can see, have inflated property purchase prices far far above their fundamental values, of calculated by Supply/Demand and by Affordability. This means that it is sentiment and lending levels that are dictating the current high prices (hence purchase prices can be seen to be far higher than rental prices). This will itself lead to negative sentiment setting in and investors and buyers no-longer see profit (e.g. from rental) on their investments. The downturn in sentiment will also naturally lead to a downturn in lending levels. With Positive Market Sentiment and High/Cheap Lending Levels removed, the purchase market will fall back to it's fundamental vales based on Supply/Demand and Affordability, which will cause a huge price correction (crash). As a minimum we will see propterty prices drop to a point where the mortgage repayment on the property is slightly lower than the current monthly rental price of that property - a drop of maybe 30-40% in prices.

In the interest of creating a starting point for discussion on this new forum, I thought I'd repost my complete argument, that I first posted on the old version. Many of you have already read/replied to this, but it's useful for newcomers..... In the last few years we have seen property prices double, even treble in some areas. There is no fundamental supply/demand reason for this in population terms. The population has had no significant increase in the last three years, nor has this demand been offset in any meaninful way by immigration. Housing stock has increased dramatically, with high voumes of new property coming on to the market, and there has been no significant destruction or removal of existing property from the market. Therefore rapid price rises must by definition have been caused by an increase in demand, rather than a lack of supply. However, incomes have not increased in real terms in any significant way over this period, and have actually grown on average slower than inflation in many areas, leading to a reduction in the median-average salary. The cost of living has also risen with higher taxes (higher taxes, NI, Council Tax, Fuel Costs, etc). Therefore people actually have less takehome income to service mortgage debts. However, what has increased demand is several factors: - Low interest rates and more liberal lending criteria (to the extreme in some cases, such as self-certifiaction) has led to banks being prepared to lend more money, and at higher income multiples. Servicing these higher debts was temporarily affordable due to low interest rates. - Where servicing higher mortgage debts, combined with lower takehome and disposable incomes may have previously caused hardships (or at least falls in consumer spending) the afore-mentioned liberal lending environment allowed people to 'top-up' expeniture defecits with credit cards, loans and re-mortgaging. - But the big factor has been Buy to Let. The temporary low interest rates and liberal lending environment led to a steady rise of property prices in the late 90's. The low interest rates and ease of BTL borrowing in the late 90's, combined with visible price rises made property appear to be a good investment, primarily in terms of capital growth, rather than in real rental yields (at least for the majority). This was assisted by the damage to many stock markets caused by the bursting of the Tech/Telecoms Stock bubbles, which made equities less attrative and left a lot of investment capital looking for a new home. With these rising property prices, property became seen as a good alternative investment by both professionals and amateurs. However, it is at this point that the boom took on bubble characteristics. The steady rise in property prices led to more and more people becoming aware of the money that could be made in a rising property market, and led to more and more speculation. More and more people were prepared to borrow into highly geared investments and jumped onto the BTL band-wagon in belief that the market could only rise. This is self-fuelling and the more people see prices rising, the more people scramble to invest, pushing prices up higher, making it appear that even more money could be made in property, causing more demand, pushing prices up further. Although in constant decline, due to the lack of affordability caused by rising prices, FTB's still pile into the market under the belief that in an ever rising market they must buy now or never (otherwise they'll miss the boat, and the rising prices will price them out of the market forever). Many will take extreme measures to get on the ladder, including lying on self-certification mortgages, teaming up with friends to buy, borrowing huge sums from parents, and also buying the smallest and least desirable properties in the belief that this is necessary to get a foot on the bottom rung of the ladder before it is out of reach. However, as the prices rose, more and more FTBs simply could not afford to buy, leaving speculative investors to provide most of the new money at the bottom of the market to keep it afloat. At this point the market had now fully outstripped it's fundamentals. FTB's could not afford to buy, and property prices were not based on the underlying value of the asset (i.e. that an average working person could afford to buy an average house) but much of the prices were now only sustained by the belief that prices could go higher (hence were still believed to be a good investment). At this point it is a pure bubble. Driven only by sentiment. (in ecominoc theory this is known as the "greater fool" principle), whereby the property cannot make you money buy selling it for anything like it's real value, only by selling it to someone who believes they can sell it on for an even higher value. At this point the rising market is already doomed. Eventually you run out of people who are prepared to believe the asset (property) can rise any further and are willing to pay you a higher price than you paid for it. This characteristic of the bubble came take time to emerge, and it's impossible to know when it will emerge. However, the market is talked-up buy banks, estate agents etc during this time to keep sentiment up as long as possible. However, even if sentiment doesn't turn on it's own, it will eventually run out of steam, where people (and at this point we mean investors) simply cannot afford to keep paying higher and higher speculative prices, or more specifically, the banks (who are in the business of risk control) refuse to lend at these prices and ever higher levels of risk. Without new money paying ever higher prices at the head of the market, the rises stop relatively abruptly (where we came to in June). The temporary equalibrium (i.e. very sudden switch to 0% price growth) is caused by the smart money (pro's) selling up and leaving the markets while the niaive (amateurs) continue to believe the "new paradigm" that property will make them rich and continue to buy. At this point in the market, anything that could resemble a sound rational purchase will now be unaffordable to the amateurs, who will seek their newest aquisitions in the least desirable properties at the bottom of the specrum. this will create a flurish of activity at the bottom of the ladder (i.e. council houses in liverpool, crewe, dartford, dagenham, etc) as the niaive money invests in all it can now afford, while the top (desirable) end of the markets stop growing and begins to fall (or at least, most properties in the these brackets just stop selling). We saw this phase of the bubble in July. Vested interested (i.e. banks etc) will try to keep the sentiment up by predicting a period of "stagnation" at this point, saying they do not predict any falls, but rather prices will have very very low growth until infaltion increases earning and the market can rise again. This is of course fiction, and all vested interests know this, but it does help to wring the last of the foolish money from the top of the bubble, while buying enough time for the professional money to exit and cover it's own backs. Now, property prices start to fall. At investors (including amateurs) panic to sell after seeing price rises stop and price falls begin. This creates over-supply into an already overpriced market. Prices will now fall, as lower and lower prices need to be agreed to keep the over-supply of property selling at a level that the now greatly dimished pool of prospective can afford to pay, or are willing to pay. This will now only return prices back to a level of affordability (i.e. where an average worker can afford an average worker property), which is about 30% below current prices, but the negative sentiment and aversion to property purchase that the massive and rapid price falls will have caused will actually cause an undershoot and prices will fall below their lonterm trend for a period. This will take total falls in prices to around 50% (national average) below current peak prices. All this time, lending on property becomes an increasingly high risk to the banks, who will continue to further restrict the amount of money they will lends on property, causing further downward pressure. So there we have it. The complete "bear" serious reasoning for the inevitable property crash. It's happened in the 70s and 80s/90s in exactly the same way described above, and there is no difference this time. It will happen again. We never learn.