A Pent-Up Supply Should Flood The Spring Market

[arrgee1991]

The 2 scenarios were just to compare 2 forecasts: HPrices and saving rates (a real life proxy for inflation). Of course it was not to be "lived in". It was an analytical tool, and an indication that real prices will never again be as high as they are now.

You think savings accounts will pay only 2% per month for the next 10 years?!

No - 2% per annum - and higher rate tax payers, which you probably need to be to afford houses will get less net.

Even if not for next 10 years, the general trend on interest rates over the last 15 years has been downward. I don't see a return to double digit interest rates. At best, 4-5% may be achievable.

I agree real prices will never be as high in the next 10 years, and it is likely that other investments will outperform.

[arrgee1991]

no it isn't fair to say this at all

supposing your average date of putting this money down in 1996, then inflation has been a total of 40% since then, so in real terms inflation adjusted you have put down about £220k. that makes a 30k profit over 14 years, (250/220)^(1/14) gives <1% annualised asset gain, which would make it an awful investment point to point in this scenario

at 500k it is a really really good investment in this scenario factoring in implied dividend rental-savings, giving a 6% annual gain PLUS dividend

at 325k it would seem fair value with a growth of 3% per year PLUS dividends, which is close to the long term FTSE pattern, maybe 350k fairer, swings and roundabouts

but when you go on about a 50% drop leaving you in profit it begs the question - compared to what, a hole in the ground?

it may never get there. it may just be a boiling frog

When I bought in 1992, I was initially paying 10% interest, and for 6-7 years the value went nowhere. I wasn't too concerned as it a place to live and I would have paid something similar in rent. The rise in value was not a major concern to me.

The point I am trying to make is that while people see a profit (even if virtual as it would be eroded by inflation), they will not be selling. Also most sellers are buyers so rises and falls aren't as important as the difference. Only those who are buying a condsiderably large house or downsizing will be impacted by falls of around 10-15%.

The flood of properties is unlikely as things stand as people won't sell simply because prices start to fall. People have been misreading the market for the last ten years, I know someone who sold in 2002 as they couldn't see property rising, and bought back in in 2007 (oops!). I think the most likely reaction is to do nothing.

People who need to sell may be wise to sell now at whatever they can get as they won't get it in a year's time, but for those who aren't selling because they can't afford to buy they will stay put. And the latter outnumber the former.

[Si1]

When I bought in 1992, I was initially paying 10% interest, and for 6-7 years the value went nowhere. I wasn't too concerned as it a place to live and I would have paid something similar in rent. The rise in value was not a major concern to me.

The point I am trying to make is that while people see a profit (even if virtual as it would be eroded by inflation), they will not be selling. Also most sellers are buyers so rises and falls aren't as important as the difference. Only those who are buying a condsiderably large house or downsizing will be impacted by falls of around 10-15%.

The flood of properties is unlikely as things stand as people won't sell simply because prices start to fall. People have been misreading the market for the last ten years, I know someone who sold in 2002 as they couldn't see property rising, and bought back in in 2007 (oops!). I think the most likely reaction is to do nothing.

People who need to sell may be wise to sell now at whatever they can get as they won't get it in a year's time, but for those who aren't selling because they can't afford to buy they will stay put. And the latter outnumber the former.

I think you arer rambling but if your point is that people who already own basically don't want to sell, whether out of habit, preference or fear, they simply won't sell. I can't see a fllood of properties for this reason. EXCEPT: I suspect many people are closer to the edge than this assumes, and BTLrs especially, and these will not always be abvious. But as for proportional numbers, I think I agree there possibly aren't enought to make a big differrence.

[Tired of Waiting]

No - 2% per annum - and higher rate tax payers, which you probably need to be to afford houses will get less net.

Even if not for next 10 years, the general trend on interest rates over the last 15 years has been downward. I don't see a return to double digit interest rates. At best, 4-5% may be achievable.

I agree real prices will never be as high in the next 10 years, and it is likely that other investments will outperform.

I agree with something like 4-5% as average saving rates for the next 10 years. Thanks for agreeing on real prices. That is my main point in this thread. Many more people are seeing this now.

And I am not saying that we'll see the whole crash happening entirely during this spring. I am just saying that we could see some 10% drops before August. Whilst a few weeks ago my most optimist scenario was 10% falls for the whole of 2011.

But there is a more practical, and hence more important issue, that we are not mentioning enough here: regional, local markets. We have been talking about national averages, And these obviously average out different regional and local changes. These local changes are much faster than national changes. I hope we have that here.

I am in an area that have behaved very similarly to yours. Here in Sussex (Brighton to Chichester) prices never fell much from the 2007 peak. Pewhaps only by some 10% until 2009, and then recovered partially. We are still near peak levels here. I hope these locals will realise that real prices won't recover, and sell ASAP. I guess downsizers, heirs, 2nd homers, etc, could be tempted. Lots of reluctant landlords here, "waiting for prices to pick-up".

In short: I hope prices drop 10% in my target area this spring. And I think this is quite possible.

[arrgee1991]

... EXCEPT: I suspect many people are closer to the edge than this assumes, and BTLrs especially, and these will not always be abvious.

It will take interest rate rises and unemployment to push people over. And as you suspect it could be many people. Should that happen things will crash and property will flood onto the market in the aftermath. Just not this spring.

[Si1]

It will take interest rate rises and unemployment to push people over. And as you suspect it could be many people. Should that happen things will crash and property will flood onto the market in the aftermath. Just not this spring.

sounds fair

[arrgee1991]

In short: I hope prices drop 10% in my target area this spring. And I think this is quite possible.

What then needs to happen is no one buys. Then people who really need to sell puit their places up at 5% less and then the flooding starts.

I have bought myself a little time in that I don't have to move for another three years, so I'm really hoping for lots of property on the market by then. Of course, everyone in my street will be selling up as well!

[The Masked Tulip]

I agree with something like 4-5% as average saving rates for the next 10 years. Thanks for agreeing on real prices. That is my main point in this thread. Many more people are seeing this now.

And I am not saying that we'll see the whole crash happening entirely during this spring. I am just saying that we could see some 10% drops before August. Whilst a few weeks ago my most optimist scenario was 10% falls for the whole of 2011.

But there is a more practical, and hence more important issue, that we are not mentioning enough here: regional, local markets. We have been talking about national averages, And these obviously average out different regional and local changes. These local changes are much faster than national changes. I hope we have that here.

I am in an area that have behaved very similarly to yours. Here in Sussex (Brighton to Chichester) prices never fell much from the 2007 peak. Pewhaps only by some 10% until 2009, and then recovered partially. We are still near peak levels here. I hope these locals will realise that real prices won't recover, and sell ASAP. I guess downsizers, heirs, 2nd homers, etc, could be tempted. Lots of reluctant landlords here, "waiting for prices to pick-up".

In short: I hope prices drop 10% in my target area this spring. And I think this is quite possible.

The problem with the sellers who do drop 10% is that when you go in there and offer the land reg official figure of 90% of asking price... what do you think those sellers are going to do? They have just dropped 10% so what will their mindset be about accepting offers below that asking price?

I suspect it will be "We've just dropped 105 so we ain't going to take a penny less" and so the house will sit there for another year.

This is the problem - virtually no forced sales.

[Tired of Waiting]

It will take interest rate rises and unemployment to push people over. And as you suspect it could be many people. Should that happen things will crash and property will flood onto the market in the aftermath. Just not this spring.

We won't have to wait much. If I am right we will see the flood starting now, and in the next few weeks. We could just see the total number of new properties arriving in the market in Jan 2011, and compare with the 3 previous Januaries. I am pretty sure we will see a considerable increase. Probably (hopefully) huge.

I hope we can also find regional data about that.

Some areas have already crashed in the past years. Others are still near peak - like mine... :angry:

[Pent Up]

We won't have to wait much. If I am right we will see the flood starting now, and in the next few weeks. We could just see the total number of new properties arriving in the market in Jan 2011, and compare with the 3 previous Januaries. I am pretty sure we will see a considerable increase. Probably (hopefully) huge.

Compared to last January we already have an increase. (At least where I am) Compared to January 09 there is certainly an increase as stock was very low back then. Not sure about January 08.

Edit: post made no sense!

Edited January 12, 2011 by Pent Up

[24gray24]

a couple of points I would like to add in to the discussion:

1. there is a little clause in most BTL mortgages, saying the owners have to keep a certain percentage of equity in. I haven't seen them recently, but I'll bet the banks have been upping the percentage over the last few months. This means that when prices start dropping, the bank writes to BTL owners and demands they put in 20,000 by the end of the month, or else.

2. There is a big new factor since the 1988 crash and that is the sheer number of BTLs.

Taken together, once prices start to drop, they are likely to accelerate away like a snowball/avalanche. In other words, my fear is that the drop will be sudden and steep, once it starts, with all BTLers being forced out simultaneously.

[The Masked Tulip]

In other words, my fear is that the drop will be sudden and steep, once it starts, with all BTLers being forced out simultaneously.

Why do you feel/fear this?

I would just add that I suspect there is a difference between a BTL that is on a BTL mortgage with a bank and all those homes that have failed to sell but wich are now being rented.

I wish to buy the latter but I suspect because the banks either do not know they are being let out on owner mortgages, or are turnin a blind eye, then these perhaps will be amongst the last forced to drop their prices?

[arrgee1991]

a couple of points I would like to add in to the discussion:

1. there is a little clause in most BTL mortgages, saying the owners have to keep a certain percentage of equity in. I haven't seen them recently, but I'll bet the banks have been upping the percentage over the last few months. This means that when prices start dropping, the bank writes to BTL owners and demands they put in 20,000 by the end of the month, or else.

2. There is a big new factor since the 1988 crash and that is the sheer number of BTLs.

Taken together, once prices start to drop, they are likely to accelerate away like a snowball/avalanche. In other words, my fear is that the drop will be sudden and steep, once it starts, with all BTLers being forced out simultaneously.

The banks are playing nice at the moment, and I don't see that they will do this soon. They would have to write off loans and repossess, and hence set off another credit crisis. The banks know the property they have mortgages on may not wholly meet the criteria, but they would be foolish to enforce it in the current environment.

The drop will be sudden and steep, but needs something to make it happen. Unemployment and rising interest rates would be my prime suspects, but neither is a problem at present.

I am still amazed that the events of September 2008 didn't lead to a crash. All it led to was the BoE sending interest rates down to near zero to the benefit of everyone not on a fixed rate deal.

The BoE will not raise interest rates even though the current levels of inflation suggests they should.

And as you say it will be worse than the last 20% drop. Back then rates went from 10% to 15% in a couple of years, a 50% change on smaller loans. Changing rates from 0.5% to 3% on large loans would have more impact.

[rantnrave]

There is the issue of what prices these properties are coming to the market... My guess is that the Rightmove price index will show a jump in the January figures, as with last year's Autumn bounce (which in reality was anything but).

[24gray24]

Why do you feel/fear this?

I fear an avalanche of selling in BTL because the owners are all looking at the same numbers.

Rents have not been covering mortgages for ages, so many of the ones that bought recently were relying entirely on CG for a profit. I doubt tenants can afford to pay higher rents if interest rates go up, they have their own financial problems, so I don't think attempts to raise rents will work.

The main variable is when they bought the house, and therefore how much equity is in it. But once prices start to drop, it triggers demands from the bank to put more equity in, which forces some to sell and lowers prices for the rest, in turn triggering more demands from the bank etc. Hence my fear of a snowball effect, starting in BTL.

The mum and pop owners who own properties outright are not under pressure to sell.

However, there is a large section of mum and pops, who do have mortgages and are in fact liar loan BTLers; as the market slides, the banks will start sending them BTL demands.

[24gray24]

The banks are playing nice at the moment, and I don't see that they will do this soon. They would have to write off loans and repossess, and hence set off another credit crisis. The banks know the property they have mortgages on may not wholly meet the criteria, but they would be foolish to enforce it in the current environment.

The drop will be sudden and steep, but needs something to make it happen. Unemployment and rising interest rates would be my prime suspects, but neither is a problem at present.

I am still amazed that the events of September 2008 didn't lead to a crash. All it led to was the BoE sending interest rates down to near zero to the benefit of everyone not on a fixed rate deal.

The BoE will not raise interest rates even though the current levels of inflation suggests they should.

I agree with all of that. The government and banks would love to keep things as they are for years, until it all sorts itself out (at the expense of savers). However, I don't think they'll be able to manage it.

First, the banks haven't confessed all their debts yet: I suspect they will need bailout after bailout and when governments eventually baulk they'll go bust).

Second: why would a saver keep his money in a bank (especially a bank that might go bust), when he could keep it in, say, silver. All the savers in US, UK, Europe are looking for somewhere to put their savings to keep them safe. Once they fix on something, savings will start draining out of some of the countries and interest rates will be forced up. Billions can drain away in days, so I expect it to be sudden.

Third: I heard somewhere that whoever goes on the gold standard first, will immediately be a much more attractive currency than dollars, pounds or euros.

[The Masked Tulip]

I agree with all of that. The government and banks would love to keep things as they are for years, until it all sorts itself out (at the expense of savers). However, I don't think they'll be able to manage it.

First, the banks haven't confessed all their debts yet: I suspect they will need bailout after bailout and when governments eventually baulk they'll go bust).

Second: why would a saver keep his money in a bank (especially a bank that might go bust), when he could keep it in, say, silver. All the savers in US, UK, Europe are looking for somewhere to put their savings to keep them safe. Once they fix on something, savings will start draining out of some of the countries and interest rates will be forced up. Billions can drain away in days, so I expect it to be sudden.

Third: I heard somewhere that whoever goes on the gold standard first, will immediately be a much more attractive currency than dollars, pounds or euros.

Don't you pay VAT on silver in the UK. If so, that means your cash turned into silver has to make a 20% profit just to break even - and that is ignoring fees?

[24gray24]

Don't you pay VAT on silver in the UK. If so, that means your cash turned into silver has to make a 20% profit just to break even - and that is ignoring fees?

When assets are in danger of depreciating by 90% (like 1929), eg companies going bust and their shares being used to wallpaper the toilet, banks going bust, property tanking, pensions disappearing, no one having money to keep retail premises afloat, etc (which is what I fear the situation will become), then the question is safety, not profit.

What cannot be devalued by a large percentage? the traditional answer is PM.

For now the governments have managed to keep people calm. But what can the UK government do when congress refuses to stump up any more money for Bank of America, and it then goes bust taking several other banks (perhaps UK banks) with it? The answer is nothing.

We are in a strangely calm situation, like the eye of a storm. The question everyone has to decide for themselves is: Are there more financial shocks to come or is this the bottom? Most people think we are already at the bottom (even on the way up); I blame the media for this. My view of course is the opposite.

Edited January 12, 2011 by 24gray24

[arrgee1991]

I agree with all of that. The government and banks would love to keep things as they are for years, until it all sorts itself out (at the expense of savers). However, I don't think they'll be able to manage it.

First, the banks haven't confessed all their debts yet: I suspect they will need bailout after bailout and when governments eventually baulk they'll go bust).

Second: why would a saver keep his money in a bank (especially a bank that might go bust), when he could keep it in, say, silver. All the savers in US, UK, Europe are looking for somewhere to put their savings to keep them safe. Once they fix on something, savings will start draining out of some of the countries and interest rates will be forced up. Billions can drain away in days, so I expect it to be sudden.

Third: I heard somewhere that whoever goes on the gold standard first, will immediately be a much more attractive currency than dollars, pounds or euros.

Interest rates will stay low unless there is a budget crisis that would force the UK to borrow money at high rates. With Ireland, Portugal and Spain all taking out large loans off the UK and the austerity measures announced in the UK, the UK is a bit down the pecking order right now.

Banks debts (like house prices) are notional. If the bank values all property assets at an average of say £200K they have no debt, should they value the same assets at £100K they are bust. Whether the value is realistic is not the point. My house may be valued at £500K , but I may not sell it for that. It doesn't matter to the bank as long as they are believe the value of their mortgage portfolio. Of course, they believed in the value of their credit portfolios until they saw they become worthless.

Savers on the whole are lazy (self included). Many stick with the same bank and have accounts paying less than 0.1% in interest. People with spare cash are paying down mortgages as they earn nothing elsewhere.

[headrow]

I agree with all of that. The government and banks would love to keep things as they are for years, until it all sorts itself out (at the expense of savers). However, I don't think they'll be able to manage it.

Only if you keep your money in an account that pays very little interest.

I have 3 different accounts , one is paying 5.39% , one 5% and just this week opened one that is paying 4.5%.

People who have left it on deposit and are only getting base rate have only themselves to blame.

Edited January 12, 2011 by headrow

[arrgee1991]

Are there more financial shocks to come or is this the bottom?

Yes there are. No it isn't.

The only thing is no one can predict what they will be nor when they will occur.

The best you can do is limit your own exposure to crisis.

Personally I'd buy wine ahead of gold because even if it crashes it value I can still enjoy it! (frivolous point)

[FIGGY]

I dont think an increase in supply witll bring prices down. In the eare I have been looking there are 600+ places I would consider living (2beds or more, House or Bungalow under £250k) within my local area.

There si plenty out there its just that there is noting to force them to sell. IR rates are the only thing I can see doingt hat or if the job losses really bite

[DotBomb]

Only if you keep your money in an account that pays very little interest.

I have 3 different accounts , one is paying 5.39% , one 5% and just this week opened one that is paying 4.5%.

People who have left it on deposit and are only getting base rate have only themselves to blame.

which account is paying 4.5% Would like to get some of that!

[Tired of Waiting]

I dont think an increase in supply witll bring prices down. In the eare I have been looking there are 600+ places I would consider living (2beds or more, House or Bungalow under £250k) within my local area.

There si plenty out there its just that there is noting to force them to sell. IR rates are the only thing I can see doingt hat or if the job losses really bite

Two things combined:

1) Changes in their lives (those probable 2 million pent-up sellers we are talking about in this thread, about 10% of all UK properties.)

2) Negative future prices expectations. According to TMT data above, about 1/3 of UK prop owners think prices will fall in 2011. The same share (1/3) of these pent-up sellers should try to sell this spring. About 0.7 million extra home for sale. There should be a flood.

As in any bursting bubble, the few who sell first, will lose less. It is a race now. And those few will be putting their homes for sale right now, still in January.

We will be able to see this happening pretty soon. At the end of the month let's see if we find data on instructions, and compare with the 3 previous Januaries (2008, 2009, and 2010). I bet 2011 will see a HUGE, increase in instructions. Enough to trigger the correction. 10% price falls in London and the SE before August.

[arrgee1991]

Two things combined:

1) Changes in their lives (those probable 2 million pent-up sellers we are talking about in this thread, about 10% of all UK properties.)

2) Negative future prices expectations. According to TMT data above, about 1/3 of UK prop owners think prices will fall in 2011. The same share (1/3) of these pent-up sellers should try to sell this spring. About 0.7 million extra home for sale. There should be a flood.

As in any bursting bubble, the few who sell first, will lose less. It is a race now. And those few will be putting their homes for sale right now, still in January.

We will be able to see this happening pretty soon. At the end of the month let's see if we find data on instructions, and compare with the 3 previous Januaries (2008, 2009, and 2010). I bet 2011 will see a HUGE, increase in instructions. Enough to trigger the correction. 10% price falls in London and the SE before August.

I am a house holder and have no need to sell until I can buy. Low interest rates have given a lot of house holders breathing space. There is an understandable impatience for prices to collapse in London and SE, but without a trigger to make it happen it won't.

1) I was a pent up seller, but as I couldn't find anything I wanted to buy in the catchment area I needed to be in I decided to extend and pay school fees. I now have a three year window in which to buy, so no rush. The pent up sellers don't accumulate. There is often a window in which people want/need to sell but if it doesn't happen they stay put or rent out their place and rent elsewhere. The need to sell dissipates.

2) With low interest rates, there is no need to sell. And for those that sell they normally buy, so they may as well wait for prices to fall as they will pay less in stamp duty when they make their next purchase.

I believe there will be less instructions in my area in 2011, and volumes will be lower. Fear of unemployment will mean house holders stay and not look to buy up. There could notionally be a 10% drop in prices, but if there is little for sale it hardly matters. If buyers start to come in after a 10% drop, then prices will rise on the back of that. Right now there are few buyers and few sellers, so there isn't a housing market to speak of. Only when people have to sell will the market be saturated.