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PotNoodle

The Attrition Stage Has Begun

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I believe we are now seeing the erosion of various ways of buying a house.

The few FTBs able to afford it and willing to take the risk have bought into a declining market.

Cash buyers with capital funds who can think of nothing better to do with it have bought for cash

during the spring.

Now, we are hearing that the Bank of Mum and Dad is supplying stay-at-home-twenties with the means

to escape from the apron strings.

Nationwide are now offering 125% mortgages - breathtakingly - to "selected existing customers with a

proven track record".

Barratts, Bovis, TW and Redrow are struggling to offload newbuilds with every incentive known to man.

===============================================================

In other words, every device possible is being launched at a weakened market.

Over time, each device will result in a modest amount of sales, and will then run out of steam.

In my view, nothing can stop this market correction from following its inevitable course.

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Agreed. No matter what houses remain ludicrously overpriced.

James Ferguson's recent Moneyweek article is worth a read for anyone who missed the recent thread relating to it:

http://www.moneyweek.com/investments/prope...here-14923.aspx

I thought that now all the big boys have marked down their land values they could start to build again and then sell at lower prices. They have to do what they do or they may as well close down (or do something else).

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I'd like to believe that house prices will revert to some lower multiple of incomes (as an STR'r nothing would suit me better), but it's a hope rather than an immutable law of physics.

1. The "3.5x multiple of incomes" model works best in a fairly egalitarian world with fairly equal earnings. But we're moving in the opposite direction, with incomes becoming more unequal all the time. Instead of a nation of 25 million homes and 25 million households (where each household could aspire to owning one home) we could easily move into a future where the 25 million homes are owned by 15 million households...and then a generation later by just 10 million households. Today's news that most FTB are relying on the bank of mum and dad is evidence of exactly this scenario playing out.

2. There was talk of mortgage multiples being enfranchised in regulation, which might have been a step towards towards restoring some previous linkage between incomes and house prices. But that's now disappearing, and with the overwhelming likelihood of a conservative government, it's a dead duck.

3. For the "3.5x multiple of incomes" model to work right across society depends on those in the lower income bands having sufficient income to fund a house purchase. In the 1960's and 1970's with relatively well paid factory jobs that was viable. But in today's Britain, where many jobs are benchmarked and paid against international competition, that's just not true. The minimum wage works out at about £12,000 per year. These people unfortunately are never likely to participate in a "property owning democracy". Indeed the threshold income for property ownership could stubbornly persist at something well above £30,000 per year.

4. History doesn't give us much comfort. In the 19th century rural properties were at about 1.2x average incomes, and urban properties were at about 1.5x average incomes. But without plentiful credit owner-occupation was still only at 11% by 1900.

5. The key fact that gets missed in the argument that "the average person should be able to afford the average house", is that the average person doesn't buy the average house. Even at it's height owner occupancy in Britain was a shade above 70%, in other words only the average of the top 70% could afford the average house. Furthermore, owner occupancy rates are now falling fast, and I can see no reason why they won't settle at the continental European level of 55-60%. This will mean that the average amongst the top earning 55-60% of the population will be able to afford the average house.

6. Finally there's the pensions nightmare. Twenty or thirty years ago most home owners didn't lose too much sleep over pensions, that was something their employers took care of. Today only four of Britains's biggest 100 companies will give a new employee a final salary pension scheme. The bottom line is that millions of people are looking for a way of securing their old age, and BTL keeps coming up as an option. Personally I think BTL is a disastrous way of building a pension, not least because as more and more people are forced into long term renting the political pressure to grant more rights to tennants will become unstoppable. But that won't change the fact that for the next decade or more there will be vast numbers of people planning on acquiring more than one property.

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6. Finally there's the pensions nightmare. Twenty or thirty years ago most home owners didn't lose too much sleep over pensions, that was something their employers took care of. Today only four of Britains's biggest 100 companies will give a new employee a final salary pension scheme. The bottom line is that millions of people are looking for a way of securing their old age, and BTL keeps coming up as an option. Personally I think BTL is a disastrous way of building a pension, not least because as more and more people are forced into long term renting the political pressure to grant more rights to tennants will become unstoppable. But that won't change the fact that for the next decade or more there will be vast numbers of people planning on acquiring more than one property.

Sad to say but undoubtedly true.

Great post BTW.

My Dad bought his first house a 3 bed semi in the London suburbs (not 1 bed slavebox with kitchendinerlounge) for £5k on a salary of £2k. I cannot see a 3 bed semi in the south east, commutable to London going for £60-70k, even now... or in 4 years time.

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5. The key fact that gets missed in the argument that "the average person should be able to afford the average house", is that the average person doesn't buy the average house. Even at it's height owner occupancy in Britain was a shade above 70%, in other words only the average of the top 70% could afford the average house. Furthermore, owner occupancy rates are now falling fast, and I can see no reason why they won't settle at the continental European level of 55-60%. This will mean that the average amongst the top earning 55-60% of the population will be able to afford the average house.

The situation on the continent is more complicated than that, owner occupancy rates are very high in Spain, Portugal, Greece, and Italy (~80%) but admittedly low in Germany and the Netherlands (~40%).

http://findarticles.com/p/articles/mi_qa54...9/ai_n21358127/

I'm not sure it's really possible to say what the optimum rate of home ownership is, certainly those under 30 will be a mixed bag with some wanting the flexibility of renting and some wanting stability and to start saving for old age in the form of property ownership. I think regardless of what the proportion is, the rules around renting need to be shifted in favour of tenants as security of tenure is almost non-existent and it's far too easy for landlords not to do essential repairs to cookers, heating etc for weeks or months. In Germany the landlord has just days to arrange repairs, and if he fails to do it then the tenant can hire tradesman to do it and the bill will be sent directly to the landlord.

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I'd like to believe that house prices will revert to some lower multiple of incomes (as an STR'r nothing would suit me better), but it's a hope rather than an immutable law of physics.

1. The "3.5x multiple of incomes" model works best in a fairly egalitarian world with fairly equal earnings. But we're moving in the opposite direction, with incomes becoming more unequal all the time. Instead of a nation of 25 million homes and 25 million households (where each household could aspire to owning one home) we could easily move into a future where the 25 million homes are owned by 15 million households...and then a generation later by just 10 million households. Today's news that most FTB are relying on the bank of mum and dad is evidence of exactly this scenario playing out.

2. There was talk of mortgage multiples being enfranchised in regulation, which might have been a step towards towards restoring some previous linkage between incomes and house prices. But that's now disappearing, and with the overwhelming likelihood of a conservative government, it's a dead duck.

3. For the "3.5x multiple of incomes" model to work right across society depends on those in the lower income bands having sufficient income to fund a house purchase. In the 1960's and 1970's with relatively well paid factory jobs that was viable. But in today's Britain, where many jobs are benchmarked and paid against international competition, that's just not true. The minimum wage works out at about £12,000 per year. These people unfortunately are never likely to participate in a "property owning democracy". Indeed the threshold income for property ownership could stubbornly persist at something well above £30,000 per year.

4. History doesn't give us much comfort. In the 19th century rural properties were at about 1.2x average incomes, and urban properties were at about 1.5x average incomes. But without plentiful credit owner-occupation was still only at 11% by 1900.

5. The key fact that gets missed in the argument that "the average person should be able to afford the average house", is that the average person doesn't buy the average house. Even at it's height owner occupancy in Britain was a shade above 70%, in other words only the average of the top 70% could afford the average house. Furthermore, owner occupancy rates are now falling fast, and I can see no reason why they won't settle at the continental European level of 55-60%. This will mean that the average amongst the top earning 55-60% of the population will be able to afford the average house.

6. Finally there's the pensions nightmare. Twenty or thirty years ago most home owners didn't lose too much sleep over pensions, that was something their employers took care of. Today only four of Britains's biggest 100 companies will give a new employee a final salary pension scheme. The bottom line is that millions of people are looking for a way of securing their old age, and BTL keeps coming up as an option. Personally I think BTL is a disastrous way of building a pension, not least because as more and more people are forced into long term renting the political pressure to grant more rights to tennants will become unstoppable. But that won't change the fact that for the next decade or more there will be vast numbers of people planning on acquiring more than one property.

People have already tried this though, many ordinary Joes DO own multiple property, and are finding out that prices DON`T always go up and that you CAN`T always rent it out! Many people have ruined their chances of a prosperous retirement through malinvestment in property. The way to a prosperous retirement is to SAVE, carry no debt, work out more than one income stream, INVEST in things you can understand. For what it`s worth I think that when base rates rise and financial regulators force more transparancy, property will be chucked on the backburner as an investment idea. It`s seductive to think of the 'big boys' always rigging everything and always winning, but as more and more people consume less the 'big boys" don`t really have much of a game? Far from being a good alternative to the diminishing chance of a pension, property was just a scam (over the last few years) maybe one of the last big scams the 'big boys' pull?

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Sad to say but undoubtedly true.

Great post BTW.

My Dad bought his first house a 3 bed semi in the London suburbs (not 1 bed slavebox with kitchendinerlounge) for £5k on a salary of £2k. I cannot see a 3 bed semi in the south east, commutable to London going for £60-70k, even now... or in 4 years time.

Why not?

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Perhaps we are witnessing the death of credit.

Once people wake up to the fact that having a cr4ppy property, new car and a big telly are not worth paying the bank interest for, it'll all be over.

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Perhaps we are witnessing the death of credit.

Perhaps we are. But if so it's only rational to expect owner occupancy to revert to the 10-11% it averaged in the pre-credit era. In other words, without credit 9 in 10 households are long term renters, even though average house prices will only be 1.2x to 1.5x average incomes.

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Perhaps we are. But if so it's only rational to expect owner occupancy to revert to the 10-11% it averaged in the pre-credit era. In other words, without credit 9 in 10 households are long term renters, even though average house prices will only be 1.2x to 1.5x average incomes.

In that scenario I'd expect to see investors offering hire purchase on homes.

Something would have to be done to increase monetary velocity of course - I've seen negative interest rates mooted, which might fit with investors treating property as long dated bonds rather than permanent assets.

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The bank of Mum and Dad possibly can't MEW if they have MEWed in the last few years, and possibly face an uncertain future employment wise. Many BoM&D's may have been tapped up by one offspring during 2004-2007 for a deposit and/or to pay for a weding, leaving them unable to magic a deposit for offspring number two.

Edited by Concrete Jungle

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Why not?

I think that there are just too many VIs to let a crash of that magnitude happen. It would mean a real terms reduction of over 50% from todays average, that would involve, to quote Billy Bob Thornton in Armageddon “Pretty Much the Worst Parts of the Bible†and I just don't think that it could happen, there would be a revolution first.

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I think that there are just too many VIs to let a crash of that magnitude happen. It would mean a real terms reduction of over 50% from todays average, that would involve, to quote Billy Bob Thornton in Armageddon “Pretty Much the Worst Parts of the Bible†and I just don't think that it could happen, there would be a revolution first.

The fact that something is jaw droppingly severe is no defence against it ever occuring. The fall of the Berlin Wall, 6m jews into gas chambers, 80% stock market falls in the 30's, the virtual end of final salary pension schemes, the collapse of the British car industry...I guess in every case someone said, "there would be a revolution first".

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Sad to say but undoubtedly true.

Great post BTW.

My Dad bought his first house a 3 bed semi in the London suburbs (not 1 bed slavebox with kitchendinerlounge) for £5k on a salary of £2k. I cannot see a 3 bed semi in the south east, commutable to London going for £60-70k, even now... or in 4 years time.

http://www.rightmove.co.uk/property-for-sa...on%26index%3D10

http://www.rightmove.co.uk/property-for-sa...ncludeSSTC%3Don

http://www.rightmove.co.uk/property-for-sa...on%26index%3D50

50 mins from London, not what id call commutable, but a lot of people would.

Working class town, but wages arent *that* much lower than the wider area, only a matter of time before these types of prices spill out beyond certain areas.

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50 mins from London, not what id call commutable, but a lot of people would.

Working class town, but wages arent *that* much lower than the wider area, only a matter of time before these types of prices spill out beyond certain areas.

Woo hoo, call Sibley, the HPC is over ;)

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5. (snip) I can see no reason why they won't settle at the continental European level of 55-60%.

Reasons why the UK doesn't have the same kind of tenancy market that Germany has:

1. Much more tenant and landlord protection, and everything written down in rules in painstaken detail.

2. A national tenant's union.

3. The vast majority of houses in Germany are purpose built apartment houses, 5 storey high, 1-3 flats per side, with 2 sides. This has a totally different economy of scale -- one boiler serves the entire house, and there is also only one (costly) roof, cellar and hallway to maintain and so on, all this saves labour and investment costs.

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http://www.rightmove.co.uk/property-for-sa...on%26index%3D10

http://www.rightmove.co.uk/property-for-sa...ncludeSSTC%3Don

http://www.rightmove.co.uk/property-for-sa...on%26index%3D50

50 mins from London, not what id call commutable, but a lot of people would.

Working class town, but wages arent *that* much lower than the wider area, only a matter of time before these types of prices spill out beyond certain areas.

They certainly are cheap, but all in need of modernisation, and more Midlands than south east.

I have a 3 bed house in the south east, and if my sort of place (was £260 at peak) went down anywhere near that, I would hoover up the whole street (slight exaggeration). If prices did drop that far, it would cause so much pain to so many people, that the price of houses would be the least of our worries.

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They certainly are cheap, but all in need of modernisation, and more Midlands than south east.

I have a 3 bed house in the south east, and if my sort of place (was £260 at peak) went down anywhere near that, I would hoover up the whole street (slight exaggeration). If prices did drop that far, it would cause so much pain to so many people, that the price of houses would be the least of our worries.

Why would you bother to "hoover up the whole street" ? If prices drop back big time and credit restricted then there won't be many buyers to sell on to. And if the buyers are renting, then you will be competing with many others to get them in your house(s). In this scenario, rents will be low, yields may also be low compared to IRs.

And the capital appreciation will be dreadful. A bit like 30-40yrs back when houses rose in line with wages or just above.

You'd be better sticking your cash in an interest paying bank account ;) not in housing.........unless you were in for the very long haul.

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If prices did drop that far, it would cause so much pain to so many people, that the price of houses would be the least of our worries.

You mean a few rich old people would have to take cheaper cabins on their cruises after downsizing, and estate agents would earn a normal wage?

Other than that, I can't see much pain for anyone.

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You mean a few rich old people would have to take cheaper cabins on their cruises after downsizing, and estate agents would earn a normal wage?

Other than that, I can't see much pain for anyone.

It would mean that the majority of people that have bought a house in the last 5 to 10 years are in serious negative equity, and would have little prospect of getting out of it for a good 15 years. These people may go the bankruptcy route, which would mean serious pain for the banks, which means serious pain for the taxpayers. Dont get me wrong, I would love to see houses cheaper like most others on this site, but to assume there wont be fallout is not realistic.

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Why would you bother to "hoover up the whole street" ? If prices drop back big time and credit restricted then there won't be many buyers to sell on to. And if the buyers are renting, then you will be competing with many others to get them in your house(s). In this scenario, rents will be low, yields may also be low compared to IRs.

And the capital appreciation will be dreadful. A bit like 30-40yrs back when houses rose in line with wages or just above.

You'd be better sticking your cash in an interest paying bank account ;) not in housing.........unless you were in for the very long haul.

It would not be without risks, but the sort of place I am talking about currently rents for about £1000 a month, so at a purhase price of £65k you are looking at a gross yield of near 20%. You could afford to take some pretty serious downward pressure on rents for it still to be a profitable exercise.

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It would mean that the majority of people that have bought a house in the last 5 to 10 years are in serious negative equity, and would have little prospect of getting out of it for a good 15 years. These people may go the bankruptcy route, which would mean serious pain for the banks, which means serious pain for the taxpayers. Dont get me wrong, I would love to see houses cheaper like most others on this site, but to assume there wont be fallout is not realistic.

Only the banks have the fortune of a bail-out the ones that had been lured into taking on high amounts of debt to buy an overpriced possession don't have that luxury. ;)

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