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Buffer Bear

Brilliant Article Linked From The Blog

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Look here.


Firstly, I will declare my interest, as a first time buyer, who believes in cycles and biding my time.

This is a most constructive and well balanced article providing the facts. Along with the Economist's reports on the global housing market, this is the most bearish article I have read (not including data/information found at www.housepricecrash.co.uk ), since the bubble went 'pop' last year. Not that this has been acknowledeged by the majority of the population.

This perception is due to the media and vested interests colluding and spinning the data to make the public believe that the market is fine and simply entering a phase of stagnation (at the top of a peak for goodness sake) and will gently fall, allowing wage inflation to catch up with house prices!! My view is that the soft landing scenario, is a near impossibility and that there "is more chance of finding Elvis on the moon" (John Wrigglesorth stated this in relation to a crash happening).

HPI has been falling for 13 months according to Hometrack. It's London index reflects house price deflation and Nationwide and Halifax indices are likely to join the show by recording absolutely no growth for 2005, even after seasonal adjustments are applied. I believe house prices will undergo a significant correction, which has already begun, and I do not think that the author's prediction of 50% falls is unrealistic. Why is it that homeowners welcome rampant house price inflation but can not comprehend large falls in value?

Property is not a one way bet as the majority of the British population commonly believe but moves in cycles (including up and DOWN!) and we have entered the downward phase, which I predict will be far more reaching and severe than the last housing downturn (1989 - 1995).

In any event, high house prices as a symbol of wealth are mainly illusionary as only a few sellers actually benefit i.e people trading down, moving to a cheaper area or selling up. Otherwise, one is just paying far more (after taking account of real inflation) for the same thing. The added problem this time is that we are currently in a low inflationary environment.

With regards to the general state of the economy, the very fundamentals that Wrigglesworth (Hometrack) Ellis (Hallifax or Nationwide) et al quote as underpinning the housing market are starting to crumble:

Repossessions are increasing

Bankruptcies are increasing

Unemployment is increasing

The other factors that will determine the path of house prices are related to the following:

Mortgage approvals have plummeted

Mortgage Equity Withdrawals (MEW) are down

The 'credit crunch' has started. Egg APR on credit cards has increased from 13.9% to 14.9%

The banks have started to report increased debt provision.

Developers are offering incentives such as paying stamp duty, giving cashback to shift properties

Many homeowners are coming to the end of historically low 2 year fixed rate mortgages

Many people have interest only mortgages (renting from the lender)

Many have lied to buy (self certification mortgages)

BTL yields in London are low and some landlords are having to subsidise their 'investment'/tenants

It is cheaper to rent than buy in many regions. That is right. Renting is not always 'dead money'

There is little or no capital appreciation

There are a glut of rental properties / new properties, which will depress prices.

Property for sale is outstripping demand

Volumes (properties for sale) have dropped off a cliff

The 'need' to jump onto the housing ladder has evaporated as prices are no longer increasing

First time buyers are priced out of the market

House prices to earnings ratios are at historical levels

Secured lending (mortgages) payments combined with unsecured lending (credit cards, loans etc) payments are equal to or higher than the percentage at the time of the last correction

Today interest rates were reduced by 0.25%. This will not halt the house price slide that has started in earnest. As for a trigger, the market collapsed under is own weight as all asset bubbles do.

I look foward to the Land Registry data Q2 2005 which is released on August 8th.

Posted by: Buffer Bear at August 5, 2005 12:13 AM

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Excellent post! Very difficult for the Bulls to shoot down anything in your long list of arguments.

If it looks like a bubble, if all the fundamentals are hopelessly and unbelievably skewed, then it is a bubble. 2006 will be an extremely interesting year, because that is when everything will start to floor.

Edited by Red Baron

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