How Will You Decide When To Buy?

[lolacarrascal]

A few months ago I suggested that HPCers now need to be thinking about timing an entry back into the market. It’s been so easy in Northern Ireland over the past few years to just sit on the sidelines and wait for further falls because the evidence of a bubble was so overwhelming. But anyone who has read through the UU house price analysis will be aware that our own bubble within the wider national bubble has now largely come and gone. As of Q2 2011, average prices in NI were just 110% of RV (Q1 2005). So what now?

Many take the view that for the housing market to recover (in terms of transactions at least) then house prices must eventually revert to an ‘affordable level’. This is normally expressed as a ratio of house price to earnings (the Halifax tell us that the long term average = 4 but by implication we should expect that at the bottom of the cycle the ratio would be even less).

We can build a simple mathematical model to use as a tool for some scenario planning. This would facilitate some thinking about how we might reach an affordable level and how far prices have to fall to reach the nominal bottom (personally I’m not going to contemplate waiting for the bottom in real terms – life (mine for sure) is too short for that in my view).

I’ve previously said that RV -20% would be my target price to get back into the market. The assumptions I’ve used for wage inflation and house price inflation in the planning scenario in the attached pdf show that would be the nominal bottom in prices occurring in 2016/17 when affordability would also have fallen to 3.2.

I can’t attach an excel spreadsheet but if you have some basic knowledge you can build your own quite easily. (copy yellow cells exactly as shown, for orange cells insert formulas as follows – for cell C3 insert ‘=C2*(1+B2)’, for cell F3 insert ‘=E3/C3‘, and for cell G4 insert ‘=G3/E3*E4’ and apply to each cell in the column by selecting and dragging the bottom right corner of the cell to the bottom of the range, for green cells enter the assumed values for whatever scenario being contemplated) Alternatively post your assumptions for the two variables and I’ll post the modelled outputs for you.

So I might not be able to buy what I want at RV-20% just yet but now I have some objective basis to guide my decision making on any particular house and what it’s worth to me and the value of waiting. A better approach than just following the herd in my view.

I invite you to have a go at some scenario planning of your own, explaining your thinking for the assumptions used and post your results for further debate. I’ve also attached an inflation scenario for the immediate future as an alternative.

Edited August 29, 2011 by lolacarrascal

[ScrewsNutsandBolts]

Every house is indivually priced, and collectively they make up the national average.

What is important is that the specific house you want is priced "correctly".

It doesn't matter whether the national average happens to be "correct" or not.

Although I am not doing so (working abroad and baby on the way so no time), I would be looking now if i had the chance.

My criteria would be a really nice house at around 03/04 prices or less.

The better suited the house is to my needs, the more I would pay (i.e. 04 instead of 03).

If I was looking now I would be surprised to find something, but who knows.

Of course as average prices progressively decrease I would stand more chance of finding that place that is right for me.

[2buyornot2buy]

I’m starting to put less stock in RV to be honest. In the areas I’ve been looking at I’m seeing nothing to suggest a functioning market will come anytime soon. All I’m seeing selling are 3 bed new builds around the 120K mark. In Belfast I’m seeing houses coming in a 10-20% under RV and still not selling. I think that in Belfast the RV is massively overestimated.

I think I’ll just continue saving. I think there will be a massive undershoot here. I think I’ll carry on seeing low transaction levels with the new build market appearing better value to the ignorant. When/if interest rates are forced up it will destroy the market here.

We’ll see many more getting sucked by the banks/developers schemes.

I’m in not rush. I’ll not start my scenario planning until 2 years time at the least. People are still delusional. I’m one of the better off among my friends but would still struggle to find what I call “value”. There’s still silly money floating around in cash. I’ve not doubt some are buying up “investment” ex council dives again but will this sustain the market. NEVER.

NI housing market is screwed. It won’t “recover” anytime soon. If I hear one more person in work saying “I bought my bungalow in 1902 and it was the best investment in my life”. I might actually shoot someone.

[lolacarrascal]

My method is just instinct. I can see no real value yet in many of the houses coming on the market in the type of house I want.

There are plenty of opportunities for FTBs just now if they have job security and have a deposit saved.

For myself though I see vendors still clinging to 2007 prices thinking their big garden is a potential building plot and not a vegetable plot. I have seen many houses on the market for over 4 years and still stubbornly not dropping a penny in price. They are just kite flyers in my opinion and not worth the petrol going to see them.

I have not viewed the inside of a single house in 5 years and I will not view a single house until I see one with a realistic price tag that I could negotiate on. I've noticed one or two that I could buy but there is no flexibility according to the EA so they can stay unviewed as far as I am concerned. I have set a maximum budget which is immovable and if I get nothing in that price range then I continue to rent and await events.

I doubt very much that your method is just instinct. By definition, any behavior is instinctive if it is performed without being based upon prior experience, that is, in the absence of learning. You have spent the last 5 years or more 'learning' about the housing market and prices, so you won't be buying on instinct but from a basis of informed opinion and knowledge.

Edited August 29, 2011 by lolacarrascal

[long time lurking]

For me its simple ,it`s when every one who have told me you must get on the property ladder start turning bearish ,and that started to happen about 6/8 months ago but they were the first and the rest are waking up slowly ,very few bull`s left but a lot of worried and financially squeezed people who were bulls

Repos are increasing rapidly, in the last 6 months or so, and the price`s have been dropping steadily in the last 3 months with most going into overdrive in the last 2/3 weeks {banks getting short of cash/battening down the hatches for a future storm?}

So to sum it up when no one else wants it

[2buyornot2buy]

For me its simple ,it`s when every one who have told me you must get on the property ladder start turning bearish ,and that started to happen about 6/8 months ago but they were the first and the rest are waking up slowly ,very few bull`s left but a lot of worried and financially squeezed people who were bulls

Repos are increasing rapidly, in the last 6 months or so, and the price`s have been dropping steadily in the last 3 months with most going into overdrive in the last 2/3 weeks {banks getting short of cash/battening down the hatches for a future storm?}

So to sum it up when no one else wants it

I don't know where you're looking and who you are talking to but personally all I'm hearing is "great time to buy if you can get a mortgage”. I think we have a few more phases of the bubble to go through before Joe Bloggs tops saying "property always goes up".

Most I talk to think this is just temporary.

[lolacarrascal]

I’m starting to put less stock in RV to be honest. In the areas I’ve been looking at I’m seeing nothing to suggest a functioning market will come anytime soon. All I’m seeing selling are 3 bed new builds around the 120K mark. In Belfast I’m seeing houses coming in a 10-20% under RV and still not selling. I think that in Belfast the RV is massively overestimated.

I think I’ll just continue saving. I think there will be a massive undershoot here. I think I’ll carry on seeing low transaction levels with the new build market appearing better value to the ignorant. When/if interest rates are forced up it will destroy the market here.

We’ll see many more getting sucked by the banks/developers schemes.

I’m in not rush. I’ll not start my scenario planning until 2 years time at the least. People are still delusional. I’m one of the better off among my friends but would still struggle to find what I call “value”. There’s still silly money floating around in cash. I’ve not doubt some are buying up “investment” ex council dives again but will this sustain the market. NEVER.

NI housing market is screwed. It won’t “recover” anytime soon. If I hear one more person in work saying “I bought my bungalow in 1902 and it was the best investment in my life”. I might actually shoot someone.

So get off the fence and quantify 'value' in your terms. It's easy to say this to avoid decison making with a risk that just end up following the rest of the herd - much harder to put a number on it now and take the contrarian view.

[2buyornot2buy]

So get off the fence and quantify 'value' in your terms. It's easy to say this to avoid decison making with a risk that just end up following the rest of the herd - much harder to put a number on it now and take the contrarian view.

I think it really depends on the house but I used to think when I came here at the beginning I would settle for a nice 3 bed terrace at around RV. Now I’m thinking to my self by the time I buy I’ll be 30 with a good local wage maybe I should be looking at 4 bed. I think when all this has ended and IR are at appropriate levels the gap between 3 bed semis and 4 beds detached will be reduced.

On the figure of where I see me buying, some of the houses I’ve looked at in South Belfast, RV is massively over valued (especially the newer built ones 2000 onwards) for these I think RV -20-30% and that will be for nice houses. I just don’t see how local earnings and even rental can begin to support these levels.

I think BTL and its death is going to continue to have a massive effect on my markets. It seems everyone I know from Jane the nail technician and John the forklift driver to Steve the CFO all have BTLs. Half the country bought houses looking for capital appreciation. If we start seeing this released I thing RV will be shot to pieces.

[MrFlibble]

When I STR in 2009 I said I'd get interested in buying again when the price of the place I sold was back at the price I paid for it in 2001. Incidental I thought prices back in 2001 were 50% overpriced.

Not so long ago I saw an identical gaff sell for the same price as I accepted in 2009, it's a slow moving train wreck over on the mainland.

[Si1]

long term FTSE profits / strockmarket yields (ex inflation) over the tricky coming decades, at best guess, seem to be in the 6% ballpark, meybe a bit less

simple arbitrage says fair value for any asset (unless you have Warren Buffet like nose for future profits) should be based on an ex inflation yield of the same 6% - since long term property price datasets suggest that house prices (including in the UK) simply follow inflation over the long term, then this translates into a marginal imputed rental yields, after stripping out expenses etc, of 6% equates to fair value - ie taking your imputed rent minus your costs

and a yield above 6% indicates bargain territory, but do bear in mind to consider all costs

[lolacarrascal]

I think it really depends on the house but I used to think when I came here at the beginning I would settle for a nice 3 bed terrace at around RV. Now I’m thinking to my self by the time I buy I’ll be 30 with a good local wage maybe I should be looking at 4 bed. I think when all this has ended and IR are at appropriate levels the gap between 3 bed semis and 4 beds detached will be reduced.

On the figure of where I see me buying, some of the houses I’ve looked at in South Belfast, RV is massively over valued (especially the newer built ones 2000 onwards) for these I think RV -20-30% and that will be for nice houses. I just don’t see how local earnings and even rental can begin to support these levels.

I think BTL and its death is going to continue to have a massive effect on my markets. It seems everyone I know from Jane the nail technician and John the forklift driver to Steve the CFO all have BTLs. Half the country bought houses looking for capital appreciation. If we start seeing this released I thing RV will be shot to pieces.

OK, so I'm deliberately being provocative to stimulate the debate. If affordability (linking earnings to prices) is the underlying fundamental to govern house prices, then what I'm looking at is how this might be reached by using different permutations of wage inflation and house price inflation. Its relatively easy to demonstrate that we could get to very affordable levels quite quickly either through rapid house price deflation, rapid wage inflaton or some combination of moderate levels of both.

But my main point it has been easy for HPCers in Northern Ireland to adopt the right strategy over the past few years of just sitting back and waiting. Much more difficult when the trend going forward might not be just as obvious and to get in before the rest of the herd does. In my view we are now entering a period where there are increasing opportunities to buy property from motivated sellers at prices that might end up not being that far from the nominal bottom. Some simple scenario planning using assumtions for earnings and house price inflation tells me that rather than any haunch, gut feeling or whot my mate told me. If I'm going to spend a few £100k of my children's inheritance, then I'm going to have thought it through as objectively as possible.

Warren Buffet says something like, be fearful when others are greedy and greedy when others are fearful. So I'm trying to re-orientate the debate from one of 'reasons not to buy' which is the easy sitting on the fence position in the current environment, to one of having more certaintly over when and why to buy, which is much more difficult but not necessarily any more risky, if the proper due diligence has been done. Unless you just want to follow the herd that is, but I would suggest that's not something any respectable HPCer should be aiming for and not where the real money is likely to be made.

I recall when my parents bought their first house just before a period of rapid inflation. Within a few years the real value of their mortage had been significantly eroded. So keep an open mind, the economics of the UK and wider world are so volatile and it might be necessary to hedge your bets between inflation and deflation. Maybe the buying opportunity of your generation will be now, particularly for those with cash able to ruthlessly exploit motivated sellers. Sitting on the fence for another while might be OK but make sure you don't fall asleep.

[lolacarrascal]

When I STR in 2009 I said I'd get interested in buying again when the price of the place I sold was back at the price I paid for it in 2001. Incidental I thought prices back in 2001 were 50% overpriced.

Why 2001 and why 50% overpriced? Upon what rational basis did you arrive at such a conclusion?

[BelfastVI]

Cant open the first file.

You are using an average income of £28k for males in full time employment. Seems high, I had a figure of £24k in my head.

Whilst the Halifax use the ratio of 4, they say "The calculation is based on a single income and is, therefore, conservative." Whether the figure of 4 is fair or not I dont know but I would agree with the second part of their statement that it is conservative because it is a single income figure. I would rather we use a average household income figure (which will be a blend of single income and dual income) which better represent what we are dealing with.

The price of a house is directly effected by the supply of credit, the cost of same, and most importantly; the cost of the deposit. If the income multiplier was the great leveller then it would remain fairly constant. The fact that it can sway from 2 up to almost 8 tells you that there is something else at play and that something else is credit. To buy a house you either need your own money or someone else. Most often a mixture of the two. When the availably of other peoples money is restricted there will be less sales and prices drop.

House Prices, as we know are a funny thing. People, on mass only buy them when they are becoming more unaffordable. When the feeding frenzy was at its rapture in 2006 there was little talk of affordability. There was little link. The link then, as the link always will be is the supply of credit. Unless that is we start buying houses with our own money rather than other people's money. That is limited to the careful or lucky few. Therefore the supply, and cost of credit is the major factor. For cost of credit read, amount of your own money needed.

Going by your table you are predicting a further 5 years of drops. And as an opinion that is fine.

You are showing a average price of £103k in 2020, pretty much the same as we had back in 2003, 17 years earlier. Which again, as an opinion is fine and you have shown your logic for this assumption and thats fine.

I do struggle with the relationship with income. (and as discussed above I believe there is a larger link with credit supply and I guess we have to assume that it will eventually return to normal. Normal being well before the previous boom. 2003, perhaps). When the UUJ prices were last at £103k the average income, for full time employed person in NI was around £20k. This was before the boom took off and two years before the Ratable prices were set. Therefore I struggle to see how an increase in income to £35k, if that were to happen, would not inflate the average house price.

[2buyornot2buy]

OK, so I'm deliberately being provocative to stimulate the debate. If affordability (linking earnings to prices) is the underlying fundamental to govern house prices, then what I'm looking at is how this might be reached by using different permutations of wage inflation and house price inflation. Its relatively easy to demonstrate that we could get to very affordable levels quite quickly either through rapid house price deflation, rapid wage inflaton or some combination of moderate levels of both.

But my main point it has been easy for HPCers in Northern Ireland to adopt the right strategy over the past few years of just sitting back and waiting. Much more difficult when the trend going forward might not be just as obvious and to get in before the rest of the herd does. In my view we are now entering a period where there are increasing opportunities to buy property from motivated sellers at prices that might end up not being that far from the nominal bottom. Some simple scenario planning using assumtions for earnings and house price inflation tells me that rather than any haunch, gut feeling or whot my mate told me. If I'm going to spend a few £100k of my children's inheritance, then I'm going to have thought it through as objectively as possible.

Warren Buffet says something like, be fearful when others are greedy and greedy when others are fearful. So I'm trying to re-orientate the debate from one of 'reasons not to buy' which is the easy sitting on the fence position in the current environment, to one of having more certaintly over when and why to buy, which is much more difficult but not necessarily any more risky, if the proper due diligence has been done. Unless you just want to follow the herd that is, but I would suggest that's not something any respectable HPCer should be aiming for and not where the real money is likely to be made.

I recall when my parents bought their first house just before a period of rapid inflation. Within a few years the real value of their mortage had been significantly eroded. So keep an open mind, the economics of the UK and wider world are so volatile and it might be necessary to hedge your bets between inflation and deflation. Maybe the buying opportunity of your generation will be now, particularly for those with cash able to ruthlessly exploit motivated sellers. Sitting on the fence for another while might be OK but make sure you don't fall asleep.

I can see what you are getting at but what I'm trying to say is that I think I'm taking a "this time it will be different" approach. I don't see HPI coming again for a long time. I don't see above inflation rises coming in my house buying lifetime. I don't see wages matching “real inflation" like it did in the 80's. What I see happening is a gradual unrelenting reduction in living standards and disposable income in NI and the west in general.

I see things getting so bad that the very least of our worries might be the cost of our house. (Might be).

I think that we have maybe past the point where our economy could be rebalanced. I thing our public sector/Professional service economy can prevent the inevitable collapse when people realise England and Greece aren't really that different and NI is a basket case with no wealth creating sector.

I'm very bearish because I'm a realist.

High inflation + Low wage inflation + low interest rates = zero growth economy and continued house price falls.

* by real inflation I do not mean RPI/CPI as measured using GOV shopping basket.

Edited August 29, 2011 by 2buyornot2buy

[lolacarrascal]

I do struggle with the relationship with income.

Actually, most people, particularly FTBers currently struggle with the relationship of house prices and income - they can't afford them.

[montesquieu]

Still looking 2 years out. Timing suits me personally anyway.

[BelfastVI]

Actually, most people, particularly FTBers currently struggle with the relationship of house prices and income - they can't afford them.

I was referring to the proposal, put forward that income would rise to £35k pa but prices would fall to £103k

[long time lurking]

I don't know where you're looking and who you are talking to but personally all I'm hearing is "great time to buy if you can get a mortgage”. I think we have a few more phases of the bubble to go through before Joe Bloggs tops saying "property always goes up".

Most I talk to think this is just temporary.

Im looking in s/e wales {not Cardiff} many are seeing the price that was payed in 2006/7 as ridiculous now, but then it was only going to go up in price, and a lot of the pepole I know fell for the jump on the boat before it was to late and bought at that time but now the chickens are coming home to roost slowly but surley. Sentiment has changed and in this part of the world average Hp to wage was probably higher than any part of the country , {excluding Ireland possibly }but the bottom end of the market is now falling apart and the BTL with sense are starting to bail out .I think there is a lot more pain to be felt in this part of the world , and I get the feeling that it is not long before in happens

On my rightmove search area 2 years ago you would be lucky to see 1 page sub 100k today there is 11 pages ,and there is a repo there for 80k which is next door to the last house I viewed in august/ 2005 which sold at auction for 110k and it needed gutting and underpinning the repo needs decorating and a updated kitchen/bathroom but still ,it has not sold in six months of being on the market

I know some one who works for a well known auction house ,and have been told by them that the owners of the auction house have been of loading there btl properties since the beginning of the year and some of the places they have owned for over two decades ,I Think that is more than a gypsy`s warning

And when joe bloggs stops saying the only way up ,is the time I buy

[lolacarrascal]

I can see what you are getting at but what I'm trying to say is that I think I'm taking a "this time it will be different" approach. I don't see HPI coming again for a long time. I don't see above inflation rises coming in my house buying lifetime. I don't see wages matching “real inflation" like it did in the 80's. What I see happening is a gradual unrelenting reduction in living standards and disposable income in NI and the west in general.

I see things getting so bad that the very least of our worries might be the cost of our house. (Might be).

I think that we have maybe past the point where our economy could be rebalanced. I thing our public sector/Professional service economy can prevent the inevitable collapse when people realise England and Greece aren't really that different and NI is a basket case with no wealth creating sector.

I'm very bearish because I'm a realist.

High inflation + Low wage inflation + low interest rates = zero growth economy and continued house price falls.

* by real inflation I do not mean RPI/CPI as measured using GOV shopping basket.

I assume you mean can't prevent the inevitable collapse.

Maybe you are right but what would a 'collapse' look like in your terms - my simple model considered the impact of a 30% fall from current levels. How much more you think? - let's say 50% by 2020 taking us back to 1990's prices. Plug a profile for that level of falls into the model along with a low wage inflation rate at say 1.5% and already by 2016 we get house prices at levels never more affordable relative to wages since records began at 2.9 and continuing to fall to 2.5. I just can't see people staying out of the market for long, if prices reached that level of affordability. The desire for most to own a home is likely to remain strong for some time, that's why this forum has such a strong following of people.

I think we need to get more sophisicated in our thinking about prices, which is all really that I'm trying to convince people of. In the last cycle, nominal prices only fell by 20% peak to trough and the affordability ratio reached 3.09 at its lowest.

[lolacarrascal]

I was referring to the proposal, put forward that income would rise to £35k pa but prices would fall to £103k

In the last crash affordability fell to 3.09 so I don't think a level 2.9 can be dismissed outright.

[culvers]

For me its simple ,it`s when every one who have told me you must get on the property ladder start turning bearish ,and that started to happen about 6/8 months ago but they were the first and the rest are waking up slowly ,very few bull`s left but a lot of worried and financially squeezed people who were bulls

Repos are increasing rapidly, in the last 6 months or so, and the price`s have been dropping steadily in the last 3 months with most going into overdrive in the last 2/3 weeks {banks getting short of cash/battening down the hatches for a future storm?}

So to sum it up when no one else wants it

Spot on and I totally agree. Once people around me have turned bearish about property, I will be hitting the streets looking to buy.

[Malthus]

Spot on and I totally agree. Once people around me have turned bearish about property, I will be hitting the streets looking to buy.

My buy signal will be when houses go on the Market and a sold sign goes up with in 6 weeks.

Deluded sellers with 2007 asking prices watching a for sale sign weather in the garden for 3 years is not a normal Market and as JD says " I wouldn't touch it with a barge pole "

[lolacarrascal]

My buy signal will be when houses go on the Market and a sold sign goes up with in 6 weeks.

So you intend to follow the herd then - btw if you thought about what you have said for just a second then you might have realised that this was the very scenario we had reached just before the peak.

Edited August 29, 2011 by lolacarrascal

[Malthus]

So you intend to follow the herd then - btw if you thought about what you have said for just a second then you might have realised that this was the very scenario we had reached just before the peak.

What I witnessed during the worst of the madness was houses selling in a week or less after a bidding frenzy. What I'm looking for is a normal Market where the asking price is with in 10% of what the Market will support, at that level a house should sell with in 6 weeks after reasonable negotiation.

IMHO this coupled with normal pre boom transaction levels is the sign the Market has recovered from the disaster of the boom and at that point I'll look to buy , if that's following the herd so be it.

[2buyornot2buy]

I assume you mean can't prevent the inevitable collapse.

Maybe you are right but what would a 'collapse' look like in your terms - my simple model considered the impact of a 30% fall from current levels. How much more you think? - let's say 50% by 2020 taking us back to 1990's prices. Plug a profile for that level of falls into the model along with a low wage inflation rate at say 1.5% and already by 2016 we get house prices at levels never more affordable relative to wages since records began at 2.9 and continuing to fall to 2.5. I just can't see people staying out of the market for long, if prices reached that level of affordability. The desire for most to own a home is likely to remain strong for some time, that's why this forum has such a strong following of people.

I think we need to get more sophisicated in our thinking about prices, which is all really that I'm trying to convince people of. In the last cycle, nominal prices only fell by 20% peak to trough and the affordability ratio reached 3.09 at its lowest.

Thanks for that lolacarrascal. I know what you're trying to do. Get us thinking when we will move. What figures we'll use to determine the ideal time to do this and what variables we'll us to help us. If I'm honest I haven’t really begun to think about this in depth and I can see why my numbers could appear arbitrary.

I don't have Exce here but I'm going to play around with the numbers at home and see what's happening. I've convinced myself it will be a few years yet before I take the plunge and I see now that I obviously need to challenge this assumption using actual data.

I do think we will have a sustained period of high GOV measured inflation (4-5%), much higher real inflation (inflation in our day to day things like fuel and food not stamps and 3D TVs at 8%) and very low wage inflation (2% - 3%) which is unlikely to match Gov RPI. My company refused to recognise RPI for salary negotiations this year. We only received a CPI pay raise. They used the argument that the majority of people do not have mortgages.

I'll take a good look at the sheet tonight and maybe post some of my results. Great topic by the way.