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Monday View: Why Britain Is Heading For A Property Crisis

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Can't disagree with any of this :)

MONDAY VIEW: Why Britain is heading for a property crisis

By Mitchell B. Feierstein

Last updated at 10:02 PM on 28th August 2011

Riots in London, fear in France and Italy, meltdown in Greece and downgrades in Washington.

These are worrying times for anyone with half a brain and terrifying for anyone with a whole one.

Give or take the occasional riot, we in Britain have tended to think we’re relatively safe from these storms.

Yes, the government managed to get into serious debt, but we’re starting to work our way out.

The ratings agencies view George Osborne as Mr Credible. And, hey, at least we’re not in the Euro.

But the British economy is stalling badly and our financial system is much weaker than the authorities would have you believe.

Worse still, the biggest threat to our financial system is one that most likely affects you personally. British property prices are far too high and set for a fall.

Transaction volumes are still unbelievably sluggish, mortgage approvals still in a slump – but the problem isn’t volumes, it’s prices. There are two main ways of measuring whether property is fairly valued or not. The first is to compare house prices with average earnings. The second compares house prices with average rents.

On both measures, the UK market looks screamingly overvalued. British house prices are around 40 per cent too high in relation to incomes and about the same amount in relation to rents.

That’s not all of it. Housing markets are volatile. That means they overinflate in a bubble, but they crash too far in a slump. If prices are 40 per cent above their fair value, a collapse of more than 50 per cent is well within the realms of possibility.

Crazy? Think about where on earth the housebuyers of tomorrow going to come from. A recent report in the Mail quoted some young people as saying they ‘don’t think they will ever be able to afford to buy a property. ’ At these prices – they’re right.

That’s why the average age of a first-time buyer has been soaring and why the ‘Bank of Mum and Dad’ remains essential to so many new buyers today.

Then think about what’s happening to interest rates. The Bank of England has been in existence for more than 300 years and it has never once operated a monetary policy which is as slack as the one that has now been in place since 2008.

Prices have already fallen more than 15 per cent from their peak despite a Bank of England rate of just 0.5 per cent.

When interest rates return to sane levels, as they’ll have to if the Bank is to cope with runaway inflation, people are suddenly going to start finding that their mortgage burden becomes rapidly insupportable. All this at a time of high inflation, high fuel prices, high food costs.

You only have to look at the US to realise what happens when you get a cycle of mortgage defaults, repossessions and distress sales. In America, prices have already fallen at least 30 per cent and they’re still headed down with no bottom in sight.

No? You still don’t believe me? Then look at it this way. Can you name any occasion in history when a developed country simultaneously faces savage government cuts, swingeing rates of tax, high inflation, rising unemployment, depressed growth abroad, rising interest rates, huge levels of debt, and doesn’t have a housing crisis?

In the UK housing slump of the early 1990s, the world situation wasn’t nearly so bleak as it is now, yet prices (in real terms) still fell by well over a third from peak to trough.

These thoughts aren’t comfortable ones. Not for me, not for you, still less for George Osborne and his colleagues. But you don’t avoid disaster by wishing it away.

Mitchell B. Feierstein is chief executive of the Glacier Fund. He has been in the financial markets for 30 years. He is the author of Planet Ponzi (due out in February 2012), which argues that the credit crisis has only just begun.

http://www.dailymail.co.uk/money/news/article-2031172/MONDAY-VIEW-Why-Britain-heading-property-crisis.html

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Some scary truths in this article. Not to worry though, houses only ever go up, right? :rolleyes:

It's going to be funny watching the horror on peoples faces when it all tanks. Houses either go down of a loaf of bread goes to £5 or £10, take your pick (Cameron, Osborne & King).

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Some scary truths in this article. Not to worry though, houses only ever go up, right? :rolleyes:

It's going to be funny watching the horror on peoples faces when it all tanks. Houses either go down of a loaf of bread goes to £5 or £10, take your pick (Cameron, Osborne & King).

Where do you get a loaf of bread for that?

[edit] sorry, playing with a new time machine, seems to have a bug.

Edited by porca misèria

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Arguements that have been tested on HPC years ago....

Countered by:

"Britain is a small island, demand is greater than supply"

"Flood gates of immigration opened"

"Housing benefit keeps rents high and underpins capital values"

"Printy Printy Printy"

"We're a nation of house buyers"

"Pent up FTBers and investors"

"UK housing provides a yield the only thing left in the UK that has value"

But it's good to see the Mail let that one slip through - are the main editors on early leave for this bankholiday weekend? You'll lose all those middle England readers to the Express!

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Arguements that have been tested on HPC years ago....

Countered by:

"Britain is a small island, demand is greater than supply"

"Flood gates of immigration opened"

"Housing benefit keeps rents high and underpins capital values"

"Printy Printy Printy"

"We're a nation of house buyers"

"Pent up FTBers and investors"

"UK housing provides a yield the only thing left in the UK that has value"

But it's good to see the Mail let that one slip through - are the main editors on early leave for this bankholiday weekend? You'll lose all those middle England readers to the Express!

I googled the author and could not find much info about him.

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I'm as bearish as the next fella, but the article doesn't make sense.

His train of thought is correct according to the old rules. But...

Has the guy been asleep since 2008? Has he not realised that applying rules and common sense to the financial situation of the world is no longer an option?

It truly is different this time and all the facts are proving it.

We all know that IRs are key here. Nothing will change if IRs remain ultra-low.

I personally would like to see normal IRs. However, I don't see how the Bank of England can be forced to increase drastically the IRs. Most people wouldn't welcome it. And the economy of this country would go down the toilet. It would be far worse than any other option. The banks would end up with millions of unwanted repos. And they don't need that, so it's not going to happen. It's the banks that rule here not cautious savers. It's not going to change any time soon (as much as we hate the current setup).

The UK has much more time than others to play that 'we're getting slowly out of this' game. That's why the BoE will wait till the very last minute with IRs rises. And that 'last minute' may arrive in 3 or 5 or 7 years.

Telling people that the UK housing crash is around the corner is just wrong.

Edited by Pole

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. .... a loaf of bread goes to £5 or £10, take your pick (Cameron, Osborne & King).

Obsesity crisis solved. Policy success. What more do you want?

Seriously though, a house price crash would cause a lot of indebted people to go into negative equity and higher rates might cause them to lose their homes and have to start again. So, in the short term it would lead to a lot of difficulties but in the long term it would lead to a healthier economy with lower housing costs and stable food prices. Better all round.

On the other hand, bread at £10 would affect all but the super rich, and before very lomg make the riots of a few weeks ago look like child's play ( which for the most part they were), and ultimately to civil war with MPs heads on sticks.

Try as I might, I can't see why an MP would embrace option 2 over option 1, yet that is what they are doing..

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Timing is everything. If I could tell which year IRs will go up, I'd know exactly what to do. But like the rest of us, all we can do is make an educated guess, and have a plan B. Perhaps the coalition are doing all they can to keep IRs low. It's not grey people that are voters but home owners.

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It's going to be funny watching the horror on peoples faces when it all tanks. Houses either go down of a loaf of bread goes to £5 or £10, take your pick (Cameron, Osborne & King).

Face it. Those three guys will always be very comfortable and I don't really think they care. They've chosen certain careers and are pursuing them for their personal benefit - it's got nothing to do with improving or caring about the lives of you and me.

If the banks want a loaf of bread for £10, it'll be £10. It's got nothing to do with us I'm afraid.

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Timing is everything. If I could tell which year IRs will go up, I'd know exactly what to do. But like the rest of us, all we can do is make an educated guess, and have a plan B. Perhaps the coalition are doing all they can to keep IRs low. It's not grey people that are voters but home owners.

The only hope we have of higher IRs is if people buying UK treasury bonds, but mainly US treasury bonds because we do whatever the US does, decide to stop buying because their returns are so low or the risk is so great.

Currently, bond holders seem happy to buy at ultra low IRs so it is going to take something major for them to stop buying.

Only when they stop buying will you see a financial crisis and IRs rise rapidly.

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"In the UK housing slump of the early 1990s, the world situation wasn’t nearly so bleak as it is now, yet prices (in real terms) still fell by well over a third from peak to trough."

That's an interesting comment, and I do remember the 1990s well!

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Sensible article but the problem is bank of England not only will keep interest rates very low , it might print some more money. Yes, it will cause inflation but BoE works for their fellow bankers not ordinary citizens. They will extend and pretend as long as they can.

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I'm as bearish as the next fella, but the article doesn't make sense.

His train of thought is correct according to the old rules. But...

Has the guy been asleep since 2008? Has he not realised that applying rules and common sense to the financial situation of the world is no longer an option?

It truly is different this time and all the facts are proving it.

We all know that IRs are key here. Nothing will change if IRs remain ultra-low.

I personally would like to see normal IRs. However, I don't see how the Bank of England can be forced to increase drastically the IRs. Most people wouldn't welcome it. And the economy of this country would go down the toilet. It would be far worse than any other option. The banks would end up with millions of unwanted repos. And they don't need that, so it's not going to happen. It's the banks that rule here not cautious savers. It's not going to change any time soon (as much as we hate the current setup).

The UK has much more time than others to play that 'we're getting slowly out of this' game. That's why the BoE will wait till the very last minute with IRs rises. And that 'last minute' may arrive in 3 or 5 or 7 years.

Telling people that the UK housing crash is around the corner is just wrong.

Well then UK must be unique seeing as property prices have tanked in practically every other western country even though they also have historically low interest rates. The only thing I can see that is unusual about the UK is the throttling of supply which is why I don't think the much talked about freeing up of planning controls will happen in a hurry. This is not because of the pernicious influence of boomer NIMBYs but because the UK banking system simply can not survive a housing crash as it would decimate its asset base. Of course, that does not mean the market will not tank any way because the squeeze on earnings from rising inflation elsewhere is going to erase those savings from lower interest rates pretty soon. When that happens something is going to have to give. One thing to watch out for is higher property occupation densities as those on tightening income resources are forced to pool resources to survive (ie multiple incomes to meet one set of housing,electric,heating,water and council tax bills). This is historically how many UK citizens lived prior to the 1960s particularly in places like London.

nb. BTW I think that the low IR policy is doomed to fail since it just perpetuates the debt crisis when in fact the best way to eradicate it would be to encourage savings back to pre boom levels.

Edited by stormymonday_2011

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Some scary truths in this article. Not to worry though, houses only ever go up, right? :rolleyes:

It's going to be funny watching the horror on peoples faces when it all tanks. Houses either go down of a loaf of bread goes to £5 or £10, take your pick (Cameron, Osborne & King).

I wish to buy futures in your bread.... I'll be laughing when you sold me bread for £10 and its twenty quintillion quid for a slice. I will however accept sovs instead for failing to deliver said bread B)

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To twist some statistics from another post. If average salary is £23.5k then a couple will have an income of £47k. Applying the traditional multiple of 3.5 they could obtain a mortgage of £164.5. With a 10% deposit they would have £180 ish available.

Even in the South East there are quite a lot of houses for sale up to that price.

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I know my work colleagues, who once were of the houses-only-go-up-in-value mindset, are now getting it. The MSM are now getting it (slowly). Are our 'dear leaders' getting it? Things (in my experience) go wrong because of laziness, stupidity or malice. Take your pick.

No wonder the rioters got such stiff sentences, the gubmint knew they needed to show people a taste of what they will do when things inevitably get worse.

It's hard not to feel increasingly anxious about where this is all going. I despair at the economists insistence that the model isn't broken, it just needs more money to fix it. As someone (here?) said, the economy is like your heating system, if you have a hole you fix it. Pumping more water into a corroded leaky system does not fix the problem.

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Well then UK must be unique seeing as property prices have tanked in practically every other western country even though they also have historically low interest rates. The only thing I can see that is unusual about the UK is the throttling of supply which is why I don't think the much talked about freeing up of planning controls will happen in a hurry. This is not because of the pernicious influence of boomer NIMBYs but because the UK banking system simply can not survive a housing crash as it would decimate its asset base. Of course, that does not mean the market will not tank any way because the squeeze on earnings from rising inflation elsewhere is going to erase those savings from lower interest rates pretty soon. When that happens something is going to have to give. One thing to watch out for is higher property occupation densities as those on tightening income resources are forced to pool resources to survive (ie multiple incomes to meet one set of housing,electric,heating,water and council tax bills). This is historically how many UK citizens lived prior to the 1960s particularly in places like London.

The uk is unique because the other countries with low rates were prices have tanked have currencies that have strengthened stupendously and inexplicably against the uk pound.

Look at house prices in Ireland priced in euros and then in sterling over the last 5 years

Now look at uk house prices in sterling and then euros over the last 5 years

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  • 284 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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