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Mindsets Of The "professionals"

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This thread starts from going past Chelmsford by train and seeing a massive Barratts building site. Odd, I thought, it doesn't seem near completion. And since I've started looking I've seen quite a lot of building activity up and down the Ipswich to London line (and especially in Ipswich).

I've also noticed that mortgage terms seem to be easier, BTL mortgages are more leniant and income multiples are being stretched.

Both of these are without any adequate research, and I fully admit that I could be wrong. However my take on market participant behaviour seems counter-intuitive. Surely people would be reigning in? So what's really happening?

Estate Agents

Why aren't they talking the market down?

Have they simply not lost as much turnover as we think they have? Or do they worry about losing instructions or rental fees? Do they think that talk of the market going down will dry things up even further? Or is it a mixture of incompetence and pride?

Builders

They still seem to be building as busily as before, and not simply by speeding up all the late stage stuff.

Am I wrong? Do they simply need to shift properties? Are the profit margins going to shrink from massive to simply reasonable? Are different builders reacting in different ways?

Lenders

These are the ones I really can't understand. Although interest rates are not going down mortgage terms still seem to be getting more leniant.

Is this simply spin (like market beating savings rates)? Are they desperate for any type of business? Are they passing off the risk to other people? If they are passing off the risk why are these other people taking it on? Is there something that makes them think that defaults are going to remain low?

---------------

I'm perfectly prepared to believe that the BTL brigade are simply in over their heads and simply don't understand business cycles, yield, opportunity cost and the risks of leverage. Some of my most intelligent friends don't either (although most of them recognise this). But why are succesful companies acting irrationally, or are they?

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Estate Agents

Why aren't they talking the market down? 

Have they simply not lost as much turnover as we think they have?  Or do they worry about losing instructions or rental fees?  Do they think that talk of the market going down will dry things up even further?  Or is it a mixture of incompetence and pride?

A typical EA office employs about 5 people, there earn a basic salary of £25K + commission, to keep office cash flow positive they need an income of x4 wages to cover overheads, that means 5 people need an income of £500,000 a year or £42K a month to be okay.

The average house cost about £150k and their fee is usually 2%, so they need to sell 14 houses a month to survive, anything above this figure is a bonus. Most aren't panicing yet but the draught has lasted alot longer than most had hoped. The failure of the Autumn pickup will be the real tester.

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Good points.

It mystifies me too.  But I have seen this behaviour amongst bankers in the past.

They all CHOOSE to believe the big lies, until suddenly the clothes are "ripped

of the emperor" and they can admit the problems.  Too many peoples jobs are

at stake, and the positions of powerful people are protected (for a while) by this

mass denial.

But when it ends, it tends to end quickly.

And those folks sitting in corner offices of banks, and are responsible for credit

policies, and not business revenues, must be starting to ask alot of tough questions

when they read Headlines liek those in today's FT.

I am short Barratt, and think it is capable of going bust in 2-3 years

So is it simply denial? In many cases it could be, but are there more rational processes going on - sales targets, selling in volume, etc.

By the way if there are any housing bulls about to post it could be that the housing price is going up but if you don't mind I'll call that denial and you can call it healthy optimism.

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Budget Cycle.

In september, they will begin preparing budgets for next year.

Is this the mortgage lenders? Why is preparing next year's budgets affecting this year's lending? Sorry to be a bit dim here.

The plug figures for Mortgage revenues will be alot higher,

What are plug figures please?

and for Bad Debt expense alot higher.

Next year will allow excuses for over-aggressive plans

How will next year's budgets allow for this year's failures? Again apologies for the ignorance.

Edited by IP Newcomer

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I read a report in the Telegraph a couple of weeks ago from one of the major building companies (sorry, can't remember which one), which stated quite openly that they would be keeping volumes down in order to keep profit margins high.

A lot of new building still seems to be starting in my area as well though... got a planning permisssion notice for a new estate with nearly 400 homes through my letterbox yesterday. This is in spite of numerous new estates reaching completion all round the area, all being sold with major discounts of one kind or another. Possibly the developers hope to sell before the downturn bites... kind of last bite at the cherry for a while.

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A typical EA office employs about 5 people, there earn a basic salary of £25K + commission, to keep office cash flow positive they need an income of x4 wages to cover overheads, that means 5 people need an income of  £500,000  a year or £42K a month to be okay.

I understand the point you're making, but I you'd have to be pretty extravagant to spend £375k pa on office overheads for 5 people.

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I am short Barratt, and think it is capable of going bust in 2-3 years

I was in the housebuilding industry last time round - until made redundant in 1991. I know loads of builders went broke - including the one I was working for (not a big company though).

Can anyone remember who went broke then? I am sure a couple of household names (housebuilders that is) went broke. I would be interested to look for similarities between them and the current crop of housebuilders.

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Builders

They still seem to be building as busily as before, and not simply by speeding up all the late stage stuff. 

Am I wrong?  Do they simply need to shift properties?  Are the profit margins going to shrink from massive to simply reasonable?  Are different builders reacting in different ways?

I was thinking that perhaps the reason why I (and others) see so many building sites is that there has been such an emphasis in the past few years on building on brownfield sites. As any town dweller is far more likely to walk or drive past a brownfield development then they are far more likely to see activity than when there were more greenfield sites.

For those of us who remember the eighties (however dimly) this may give two false impressions, (1) we may be over-estimating the newbuild oversupply because we're seeing a larger proportion than we're used to and (2) the building that is still going on now may be the only building going on.

Edited by IP Newcomer

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I understand the point you're making, but I you'd have to be pretty extravagant to spend £375k pa on office overheads for 5 people.

Hi NJP, don't forget that the employees might get £125k in wages but I think this costs the employer about 180% of that in NI, pension contributions, etc etc. So the wage bill is more like £225k. Still must be hurting to be an EA...my heart bleeds.

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A PERIOD OF FINANCIAL EXCESS, we are in...

(Doug Noland writes about the USA Bubble):

"Late-stage Credit Bubble dynamics create a fascinating and analytically challenging environment. The massive ongoing Financial Sphere expansion ensures that only more excessive amounts of finance chase increasingly risky/extended borrowers (financing ever more inflated asset prices). The unprecedented influx of players into the mortgage business guaranteed today's narrowing lending margins, while late-cycle Credit risks grow exponentially (due to leveraged marginal borrowers, minimal downpayments and loose terms, over-building, price inflation, generally maladjusted economy, increasing financial fragility, etc.). All the same, the most prominent influence on lending decisions during this final phase of the boom is the necessity to sustain short-term reported accounting profits (inflated by under-reserving for future, post-Bubble Credit losses). A deteriorating financial backdrop - in this age of unlimited liquidity - ironically spells increased lending volumes, further asset inflation and greater economic distortions.

Goodness gracious. What a load of old US-style waffle.

Let's start again:

"Despite increasing risks as property has hit a peak and is now declining, lenders are still extending loans to overstretched and risky borrowers".

I think that was the essence. Property-speak is getting as much out of hand as property inflation. Save the planet...fewer words for more meaning!

VP

Edited by VacantPossession

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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