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House Price Crash Forum


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Everything posted by Tommy

  1. Well, there are many reasons, the most important is: you have to live somewhere, you cannot sleep under a bridge. The main two options are: - renting a property - owning the property in which you leave When the housing market is booming everybody wants to step into the housing ladder or wants to stay on the ladder and so demand for property on sale increases and demand rental property decreases. Also many of the people buying will also want to let out thier properties (Buy to let) and so the rental offer increases. So housing boom = less demand for rental and more offer for rental. The law of economics of demand and offer applies. When the house prices are falling many would be First time buyers are not willing to buy as prices are going down so they keep renting, people who own a house might be forced to sell due to financial problems and they go back to renting. So housing crash = more demand for rental properties. The law of demand and offer still applies. In general rents and house prices tend to grow at similar rates over the long term, but over the short term they do not. During the last crash of 1989 house prices were generally falling and rents were generally increasing. Also since 2001 rents have increased very very little. Now they are starting to pick up again... (and the housing market is cooling). So you are right, over the long term, increasing house prices will increase rents. But this is not what happens in the short term. There are also other reasons, but this is the main one I think.
  2. I would like to ask you a couple of favours: - Do not make assumption on other people. - Do not use F-words even when masked by weird characters - Do some reasearch before replying to posts in this way To reply to your post: Having to pay 1.5k every two years in fees is surely a bad thing. I mentioned this, I said it was awful and that there are other deals with smaller fees and I also gave my example of remortgage. Also 1.5k is a fixed amount. The loan can instead vary, so sometimes is not too bad. 1.5k is 750 pounds a year. If your loan is of 250k this is 0.3%. So current base rate is 5.5%, the deal was at 5.0%, in other words the deal would be like paying 5.3% a year in interest and no fees which is still below the base rate. So in this case is not too bad... My example however had a loan of around 100k, so 1.5k makes the deal worse than base rate. This means that you need to find a mortgage that has a fee which is proportioned to the loan, or simply a smaller fee. This is why I sais that 1.5k every two years is bad and people should find a better deal. I always try to pay at most base rate and so far I have succeeded. What was your point?! Of course banks are in to make profit, I have never said otherwise. The above sentence is clearly written in Queen's English... I would ask you to look up two terms: - fractional reserve banking - fiat money Maybe you'll understand what I meant. Ah, by the way, if you can open a new bank go ahead and do it. The truth is that the Bank of England is a private company that has a monopoly to print money and to set interest rates, this monopoly is given to it by the government. A nice documentary (but a bit too against the BOE and the Fed) and rather long is: http://video.google.com/videoplay?docid=-515319560256183936 In England we have FIAT money, so the bank of england can print money without having to back it up with a metal (like gold or silver). When the bank of england prints money it costs very little to them: a 50 pound note costs very little in paper and the note does not have a corresponding 50 pounds worth of gold. This is fiat money. (What is more you do not even have to actually print money in cash nowadays...) After the bank of england "prints" (or simply creates) FIAT money it lends it to the government and to the banks at 5.50% (the rate it sets). These banks then, thanks to fractional reserve banking, can then lend to customers much more than they hold on reserve (fractional reserve banking). The point I was referring to is the point about the fractional reserve banking. They can lend more money than they have! This is what I meant when I said that they can create money out of thin air (and I mentioned I was referring to fractional reserve banking). It's not supposed to be a theory, it's supposed to be a fact called fractional reserve banking. The first sentence in wikipeida says: "Fractional-reserve banking refers to the common banking practice of issuing more money than the bank holds as reserves. Banks in modern economies typically loan their customers many times the sum of the cash reserves that they hold." A few links: - http://en.wikipedia.org/wiki/Fractional-reserve_banking - http://en.wikipedia.org/wiki/Fiat_currency - http://video.google.com/videoplay?docid=-515319560256183936 Look them up and then if I misunderstood something please correct me. But please do not post messages like this without doing your homework first.
  3. Yes it is possible. But as I have said, assuming rents do not fall (which is unlikely), even if house prices decrease you do not lose money unless you sell. Youl would be breaking even or making a small profit on the rents and losing equity on the house. Of course you want to sell either before the crash or after prices have picked up again. Selling at the lowest point in the crash is the worst thing, so if you wait and see and then sell at that point you're making a mistake. If you have bought a bad property that does not rent out easily and when it does it does not even repay the interests on the mortgage then you should be selling now as it is unlikely you are going to be making a lot of equity in the next few years, so chances are you're going to lose money... If you are making decent profits on your rents then you might decide to keep them even throughout a crash (which is not necessarily going to happen anyway). This is also the decision that most people who would have negative equity after having paid capital gain tax will try to go for. Ah, there is not limit to how bad things can go: - house prices could decline by 30% - rents might (for some strange reason) also fall by 30% - interest rates might get to 15% - unemployment migh rise to >10% - all immigrants might leave the UK thus lowering demand for rents and causing lots of voids (and lower rents). etc... In this scenario the average BTLer would go bankrupt, woudl have to sell everything losing all money and equity and also their own house. Thing is: - I do not thing nominal prices could possibly fall by more than 15% (if they fall at all). - if prices fall rents are likely to increase - interest rates will probably never reach 6.50% - unemployment hopefully will not rise to anywhere near 10% - immigrants are still coming and increasing demand for rents and housing in general.
  4. I used Leeds as an example because that's where I am from and that's the market I know the best. I am often in Cambridge and the same apartment just outside Cambridge would cost >150k, you are right. However it would not rent for 550 partly furnished but for >750. A friend of mine is renting a small two bed apartment apartment near Newmarket road for 750 unfurnished and the costs would be around 150k. So it's not very different and I am sure you can find better deals anyway. I am sure many people on the forum are renting are renting a similar apartment in the Cambridge area for 400 or 500 pounds but these are old contracts that have not been updated over the years. New rents are high, I regularly get Cambridgeshire property plus which has both properties for rent and sale and rents are very very high! (and sale prices also of course).
  5. yeah 5.50% but I tried to explain in my post that BTL can still give you more than 5.50% . Of course each time the base rate rises BTL becomes less profitable. Of course each time the HPI slows down BTL becomes less profitable. The truth however is that as things currently stand BTL is generally still more profitable than an saving account. A few years ago you could not even compare the two: one would have been 5% at most and the other (BTL) could have easily reached figures above 100% a year. So, if IR keep rising and the market keeps cooling, at some point BTL will be less profitable than a saving account. It is not guaranteed however that this is what is going to happen... If you tell me that interest rates will be 5.75% by the end of the year I can probably agree and tell you it is very likely. But if you tell me: > over the next few years these rates will be increasing I am not so sure. I still do not think they will keep climbing for a few years and I still do not think we are going to see anything above 6%. In a few years there is a possibility that interest rates might start to come down a bit again... Frankly 5.5% when RPI is about 4% is not much, you do not get rich that way. Finally one thing we have not discussed is that inflation is currently a bit high (this is the reason for the rate hikes). Now inflation is bad for savers. If you have a 5.5% saving account but inflation is at 4% you're making only 1.5%. Inflation is however good for borrowers as it shrinks the debt you have (in real terms), it inflates rents (in nominal terms) and it makes your montly repayments of the mortgage more affordable. Of course the best type of inflation for BTL is "house price inflation" and this is the one that's slowing down, but even RPI inflation can be beneficial for BTL borrowers.
  6. I think the 7% was a regular saver... http://www.halifax.co.uk/savings/regularsaver.asp Regular savers are useless if you have a decent amount of cash. They are only interesting if you are saving each month and do not have much cash at all. The initial deposit you can make is usually very very small (i do not see it on that page but it's usually less than 500 pounds) and the amount you can save each month has to be at most 250 pounds. 250 times 12 months is 3k a year. Then you get 7% on the average sum you had which is deposit + 3k divided by 2. So at most you can get 7% on 2k (although you actually have 3k in the account). The child account you're talking about is yet again another saver: http://www.halifax.co.uk/savings/childregularsaver.asp only this time you can put 100 a month at most. So, let's suppose I have 5 BTL properties and I have decided it's time to cash in. By selling them I make 100k net profit... How I am going to take advantage of a regular saver?! (other than use a normal saving accoung + 2 or 3 regular savers to get a bit more on a few Ks).
  7. I have just remortgaged my house with the same company I was using before and my mortgage is a tracker +0.0% base rate for 2 years and I have paid no fees and after that there are no penalties to pay off the mortgage and move to another company. You can probably get some deals below the base rate although for buy-to-let mortgages is slightly harder. This for instance : http://www.themoneycentre.co.uk/SearchProd...mp;link=r250507 appears to be: - base rate minus 0.5% (so 5% now). - after two years is base rate + 1.95% which is awful but you have no penalties after 2 years if you switch to another mortgage! - if you repay it (sell the house) before 2 years you pay 6% penalty (another reason not to sell!). - 1499 pounds arrangments fees (very high, but I am sure it's possible to find a similar product with smaller arrangments fees). The above is probably not the best deal because of very high arrangments fees, but I am sure if you shop around you can find something with lower arrangment fees. For example I managed to negotiate no arrangment fees when I remortgaged my house, they wanted about 400 pounds but I threatened to leave them. > try your calculation again with a Market Rate e.g 6.7% or 7.0% at the SVR rate which is the REAL cost of borrowing > from these institutions and the arrangement fee etc etc. 7% plus arrangment fees is way above any rational deal out there my friend! England uses fractional reserve banking, so Banks not only can borrow from the BOE at 5.5% but they are allowed to lend more than they have. They can borrow for example 15M, keep 15M as reserve and lend 100M created out of thin air. They can lend money "that does not exist". So they have huge leverage. So bank that borrow 15M at 5.5% fromt he BOE and then give out 100M worth of mortgages at 5.5% without any fee is still making a lot of money!!! Also bear in mind that my calculations are based on the fact that you bought property now. If you have bought it in 2003 for instance your income from rents is much higher of course (unless you have remortgaged) and so even a 6% base rate would not be a problem.
  8. Reading this it sounds like this is what I have done. It is not. It was just an example.
  9. In the leeds area there are apartments that sell for about 100k and can be rented out at 550 partly furnished (a few houndred pounds at Ikea!). So the BTLer would put 20% deposit down: 20k and would borrow the remaining 80k. The interested only mortgage on 80k would be 4.4k a year at 5.5%. 550 rent times 12 months is 6600. Take out 2 months of void period: 5500. Take out 50 pounds a month of service charges: 5k a year. For this example I assume that the flat is not rented via an agency. The result is that you've put 20k down and you are earning 5k (rent) - 4.4k (interests on the 80k). So you've made 600 pounds, this is 3%. I agree this is bad and to get this you have to go through a lot of hassle! A few years ago the same place would cost 60k and the rent would be 500 and it so it used to be much better. Now on rents you're not making money... you are right, but... Now, this is where the leverage from the debt comes in: Assuming house prices cannot increase anymore above inflation because they have kind of peaked, let's say they keep growing at 1.5% a year (this is a bull's or neither's view of course). Now 1.5% of 100k (property value) is 1.5k. But you've only put 20k down, so 1.5k is 7.5% (and not just 1.5%). Now, let's add all together: - 600 pounds made from rents - 1500 pounds made from HP index This is 2100 pounds which is 10.5% ! Now, tax on the rent is not a problem, 600 pounds will never be taxed due to tear and wear exemption and various other costs you can claim back. Capital gain tax however is an issue. You need to keep the property long enough to take advantage the tax relief that increases over the years you own the property or you need to sell it before it exceeds the annual tax-free limit (which is currently about 8k I think). So, if you plan you tax well it can be quite profitable even with house prices increasing only at 1.5% a year. Bear in mind that people have been talking about a HPC for at least a couple of years and during these years house price increases have been well beyond 1.5% and so BTL equity profits have been quite good. Now it all depend on the main question that this forum tries to answer: Will house prices crash? Will they slowly decline in real terms (and in nominal terms maybe keep growing >1% but below RPI-X) ? The bear view would suggest it's time to cash-in. The bull's view suggests you can keep your properties. The problem with cashing in is that many BTLer are in a situation that forces them not to sell so they will have to hold on to their properties even if they were falling 1% a year and so they would be losing equity (but still making some cash on the rents). This is because many BTLers remortgage their properties... A simple example is: I bought a property for 40k in 1998 putting 5k down (35k mortgage). Last year it was worth 120k so I remortgaged it and borrowed an additional 70k which I used as deposit for another 3 properties. Going back to the original property, it's worth 120k, I owe 105k and I have 15k equity. If I sell the property I have a capital gain of 80k, I have about 8k exemption for the year, some relief for having had the property for 9 years but the amount of capital gain tax that I have to pay is still more than my 15k equity which means that I have to find some money to be able to sell my house and if I do I lose money. It's much better to keep the house and wait for house prices to pick up again. Notice that the 8k exemption is across all properties, so if i have 10 properties, it's still only 8k !!! Disaster would happen if BTLer were losing a lot of money on rents. They would lose money by keeping the house and they would also lose money by selling the house. A lose-lose situation! However history taught us that periods of falling house prices usually are accompanied by rising rents... N.B. In this post I have been a bit imprecise with numbers and percentages, roughly they are right, I did not want to spend time double checking them or finding accurate figures on the web (whcih I usually do). In summary: - if there is no crash but just a slow down BTL can still be profitable and it's likely to be better than your 6% investment with Halifax. - if there is a small crash, many BTLers will still make a miserable profit on rents, but will still not sell in order not to lose money all equity and possibly extra cash on capital gain tax. So they would have to hold on. Other BTlers who remortgaged in a more conservative way might sell and invest somewhere else more profitable. - if there is a big crash and rents also decrease (unlikely since everybody wants to rent rathern than own when prices are falling) then all BTLers will be in huge problems.
  10. 1) make sure your job is stable and you're not going to be made unemployed (hard to ensure). 2) if and only if point one is acheived, then get into massive debts and buy assets with the money your debts will be reduced very quickly by hyperinflation, the value of your assets will be quickly increased by hyperinflation. you do the maths... You might think point 1 is hard, but point 2 is also hard, banks would not be very happy to give you a lot of money that when you repay back is worth nothing.
  11. In the past governments also used to repay their debts by printing more money. This used cause a lot of inflation so they have stopped. They can virtually print new money very easily, we are not in a metal standard anymore, it's fiat money!
  12. Althouth M4 (broad money supply) has recently been a good indication of asset price inflation, it is not a good indication of CPI or RPI-X (general inflation). I agree inflation is caused by increasing the money supply, but M1 is probably a better figure to be looking at for CPI and RPI-X.
  13. what the link you gave (about 1929 depression and Nasdaq 2001) is failing to not the following few fundamental details: - 1929 has bee a depression, 2001 has been a small recession. - the depression in 1929 lasted 43 months in the US, the 2001 recession lasted 8 months. - during the depression of 1929 the peak of unemployment reached 24.9% in the US, while in 2001 it peaked at 6%. - although the website says 2000-2003 the economy as a whole was only in recession for 8 months in 2001. So, it's very nice to compare the trends of the graphs and show they are similar, but do not assume that just because the trends are similar the magnitude of the recession was also similar. The depression of 1929 had massive reperecussions on the economy while the one of 2001, in comparison, was mild.
  14. I think both the author of this article and you are too pessimistic and apocalyptic! There is no indication that the economy is this bad and even if it were macroeconomics is a much more mature science now and there are good ways of getting out of recessions sooner (and ways to avoid recessions if possible). A small recession does not look impossible given the current state of US, but comparing it with 1929 now seems nonsense.
  15. many people go to an estate agent and they get their property valued. Let's say the agent tells them that the property is worth anywhere between 95k and 105k. For 95k it should sell pretty quick while for 105k it might take a little longer. Some people decide to try at 105k and then after 4 weeks they might change their minds and lower it to 100k to sell it quick. They should have put it on the market at the market price in the first place... During the boom years, the technique of putting the house on the market for a slightly higher value used to pay off, if you had not sold the property within four weeks, after four weeks it would probably be worth 5k more anyway and you would not have to lower the price in order to sell it. Now that house prices are slowing down this technique is not ideal anymore. Could this be the reason? I do not think prices are falling in general...
  16. Everything is possible in life, it's just a metter or probabilities... In my opinion the probability of a 700k house coming down to 300k is nearly 0.
  17. The drops your are talking about are considerable. We just have to wait and see I guess.
  18. I know nominal prices have gone up much more than real prices. Still real prices have risen more thatn "very little", so you're wrong: As I have said the average nominal house price is now 175k (actually more now), it was 40k 20 years ago. It's real price (adjusted for inflation) 20 years ago was 83k. So nominal prices have more than quadrupled while real prices have doubled. You call this very little?! I understand this might be a peak, but still it proves my point. Also in a crash, people are not worried about falling real prices (which is probably a good thing), but about falling nominal prices. My point was and still is that nominal prices have quadrupled in 20 years and so in 20 years for now chances that they will be less than or equal to what they are now are very very slim, almost impossible. Most people buy a house with a mortgage and so they are more interested in nominal prices than in real prices. Also, inflation, which usually is a bad thing fro savers, is a very good thing (when controllable) when you have debt (like a mortgage). I thank you for your advice, but frankly I tend to read more formal books. Also, you do not sound like an economics professor either, so maybe you should first worry about yourself, then once you're really prepared, then you might want to start giving advising people....
  19. a 40k / 50k drop means nothing if you do not say what the original figure was. This is why people often give percentages... a 40k drop on a property that is worth 1.4 million pounds is nothing, while a 40k drop on a property that is woth 90k is massive! I have noticed that many people decided to put their houses on sale before June the 1st so that they could avoid having to pay for a HIP. This greately increased the offer (and thefore since demand stayed the same prices might have gone down a bit in some areas). I guess after the 1st of June there will be less offer (because most people have sold their houses before HIP already) and so those prices that went down might jump back up again (or maybe not due to the last interest rate increase). I think it is again too soon to say anything really. In my opinion, the general trend is still that prices are going up, slowing down a lot, but still going up. With the last interest rate hike they should slow down even more, but I still do not think it's enough to cause a crash.
  20. Yes, but I do not get what you mean... Italy is not the poorest of the countries with the Euro currency. I think Greece, Solvenia and Portugal for instance have worse economies. Also the Euro is most probably about to be adopted in contries with even weaker economies.
  21. Italy will not be thrown out; it's one of the founding members and it's economy is not all that bad anyway. Italy is one of the members of the G8 (G6). It would be very interesting to know why you are being so rude... Maybe not... since reading it again you sound just very pathetic and inarticulate.
  22. Why would this be?! I do not think Italy will be thrown out. I also do not think they will decide to leave...
  23. I work in IT. I am a senior software engineer. My company has a few engineers in Bangalore India because they are still a bit cheaper, but the "immigrants" in my office (we have a couple of europeans and one from pakistan) are getting paid the same as the other british engineers. They are not being paid less, they are paid, on average, the same. Oh, I forgot about the Irish "immigrant" who is also being paid the same. The average GP pay is over 100k, so if immigration was pushing wages down I think it would be a good thing. The NHS cannot afford to pay so much to so many doctors. I am paying a huge amount of income tax and NI and the service I get in return is pretty bad (but better than some other countries of course).
  24. So, if you are convinced that the majority of the population does not want the current level of *legal* immigration, why don't you start collecting hundreds of thousands of signatures in support of your cause and start trying to force the government to act? I have a feeling that the vast majority of people want to stop *illegal* immigration, but they have nothing agains legal immigrants who are coming to work hard and be part of the British society.
  25. yes and the history repeats itself over and over. It happened in the past, it is happening now. I can confirm that I do not have any problem with the current level of *legal* immigration. True. The fact that you do not agree with my arguments does not imply that they are silly. We simply have different views. You have a problem, I do not not.
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