Was Housing Undervalued In Past Decades ?

[mercsl]

A question for the HPC bears.

In past decades have house prices been undervalued?

All the charts and arguments have been why house prices are overvalued now but the flipside is to prove why they were priced correctly in the first place.

My own thoughts are that they were quite undervalued due to inefficencies in the UK banking market, housing policy and draconion rental laws. Bears constantly hark back to the past and their 3.5 times salary but was the market then just as artifical as bears claim it is today?

When I came from Australia I was suprised how backward UK banking was especially in regards to lending for rental properties and the products available. It was hard enough just getting a bank account. Rental laws were madly on the side of the tenant which led to no investment in decent rental properties. There IS a housing shortage...a shortage of houses people actually aspire to live in.

Things ARE different now and we will not be going back to the past. Come on bears prove they were not undervalued.

Edited October 12, 2005 by mercsl

[Elizabeth]

I don't know what anyone else thinks, but strictly speaking my understanding is there is no such thing as undervalued or overvalued in a market. There is simply what people are prepared to pay. At present less people are prepared to pay that much money representing that much time and that much effort to put a roof over their heads. When there was less debt people were prepared to pay more money because they had access to more money and didn't count the cost in terms of time and effort. ouch! The rest is just judgement about what is important both socially and individually - personally I think house prices are a scandal, but that's my judgement rather than anything rational. Its also my vested interest, but the outcome is 'Can't pay, won't pay, wouldn't pay even if I could'. Thats the rational bit.

[the end is a bit nigher]

yep - everything was undervalued for years and all those stupid people just didn't realise it - next

[CrashedOutAndBurned]

Yes, now that anyone with a pulse can borrow what they want until they bankrupt themselves, commit fraud, and take speculative punts with mind-boggling amounts of borrowed money, property has now reached its true value.

It was only communist-style interferring and damaging regulations that kept property from reaching the true value it enjoys today.

Edited October 12, 2005 by CrashedOutAndBurned

[frugalista]

A question for the HPC bears.

In past decades have house prices been undervalued?

All the charts and arguments have been why house prices are overvalued now but the flipside is to prove why they were priced correctly in the first place.

My own thoughts are that they were quite undervalued due to inefficencies in the UK banking market, housing policy and draconion rental laws. Bears constantly hark back to the past and their 3.5 times salary but was the market then just as artifical as bears claim it is today?

When I came from Australia I was suprised how backward UK banking was especially in regards to lending for rental properties and the products available. It was hard enough just getting a bank account. Rental laws were madly on the side of the tenant which led to no investment in decent rental properties. There IS a housing shortage...a shortage of houses people actually aspire to live in.

Things ARE different now and we will not be going back to the past. Come on bears prove they were not undervalued.

Interesting point.

You mentioned that UK banking under a more regulated regime was "inefficient". But the regulations were there for the reason of preventing speculative and volatile swings in asset prices. The intention was to protect ordinary people from having their finances wrecked by boom and bust.

You mentioned that rental laws were "draconian", and "madly on the side of the tenant". Again, the intention was to protect ordinary people from the horrendous practices of landlords of the 50s and earlier.

We do not aspire to live in a free-market wild west. The UK, like the rest of the EU, is a mixed economy where the market dominates, but is regulated in order to protect the interests of ordinary individuals. Perhaps there will be "no turning back" as you mention. But most people in the UK believe there is a place for regulation. If there is a big crash, I hope the political class will respond with the real remedy for boom and bust: proper regulation!

BTW I think UK retail banking is world class (I am comparing it to other places I have experience of: France, Germany, Spain and the US).

frugalista

[Fancypants]

When I came from Australia I was suprised how backward UK banking was especially in regards to lending for rental properties and the products available. It was hard enough just getting a bank account. Rental laws were madly on the side of the tenant which led to no investment in decent rental properties. There IS a housing shortage...a shortage of houses people actually aspire to live in.

there's your answer. Coming from Australia I can understand why you might have a generally disparaging view of the UK housing stock.

more people, less space.

[IPOD]

Was Housing Undervalued In Past Decades ?

The fact that it keeps oscillating wildly around a mean ought to tell you something. 3.5X wages is the equilibrium value.

Oh, and whilst we're on the subject of "backward" banking systems, which country is it again where they charge you just to have a bank account? (Hint: it begins and ends with an A and isn't the UK)

[mercsl]

So basically you are all admitting intervention kept prices artifically low???

Intervention did not stop the swings in the house market even with the old 3.5 times salary. Everyone was on variable rate back so more vunerable to interest rate changes. It could be argued it caused a lack of investment in UK housing stock that gave rise to some of the problems we have today.

Edited October 12, 2005 by mercsl

[nodumsunreader]

The fact that it keeps oscillating wildly around a mean ought to tell you something. 3.5X wages is the equilibrium value.

You mean it WAS 3.5x wages when long term interest rates were double what they now are. Greater affordability linked to lower rates has pushed up the multiplier way above the old level - using 3.5 as a multiplier and justification for a crash continues to be an obsolete argument.

[Sledgehead]

Maybe Baltimore was correctly valued at 500 times earnings and now is a huge buying opportunity?

But joking aside, you do have a serious problem merc.

People like you say it's okay that FTBs are priced out / get better value renting as BTLs will "snap up" props and maintain demand, thus prices. By BTLs you presumably mean investors. The thing about investors is, no matter how green they start off, they all come around to the same conclusion: capital should be deployed where it's risks are rewarded comensurately with returns. In other words, property competes as an investment asset against other investment assets. Some have higher risks and higher returns, some lower risks and lower returns. The problem comes when you wake up and realise that many other assets offer higher returns and lower risks. That's when you know your eggs are in the handbasket going to hell.

Currently you feel property to be risk free. However, the mere fact that it experiences volatility proves this not to be the case: people have and do get burned by property investments. The question you must ask yourself is are there investments out there that others know about that I don't: investments that offer lower risk, yet higher returns. See, the problem is, if you haven't looked around, you may well be the last to notice.

Perhaps you would care to share with us the return on capital employed that your BTL portfolio currently delivers (not your return on investment - that is a function of levergae and current bank fashion). Perhaps we could then see how others are employing capital and whether yours shapes up?

Next thing to worry about is all the folks who bought later than you. What kind of return are they experiencing? Do you follow my drift? When my Father taught me to drive he said: "It doesn't matter ho wgood you are, there is always going to be some fool who 'decides' he's going to crash into you." In other words, your yields may be fine, but what about the 75% of BTLs who only started buying in 2000. How many of those bought last year, their confidence bouyed by the exhuberent market? makes you start to think, no?

Then you have to factor in market sentiment. Markets don't just go up on fundamentals, but also through cheerleading. Find an asset that eveybody hates and you have an asset everybody has sold. All it takes is a small swing in sentiment and prices improve as folks start to buy again. Given how property has been thrust upon us as the asset of choice by the media, the gov, one man an dhis dog, I suspect that little can happen to sizeably increase its popularity. On th eother hand, should its star status become tarnished.... oops!

Let me put it another way : booms never end in a sigh of relief.

Edited October 12, 2005 by Sledgehead

[frugalista]

So basically you are all admitting intervention kept prices artifically low???

Intervention did not stop the swings in the house market even with the old 3.5 times salary. Everyone was on variable rate back so more vunerable to interest rate changes. It could be argued it caused a lack of investment in UK housing stock that gave rise to some of the problems we have today.

Intervention did stop a lot of the swings I suspect. By the time of the Lawson boom and the crash of 89-93, most of the regulations on mortgage lending were long gone. This time round, the boom has been even bigger due to the "affordability illusion" brought about by low nominal interest rates.

Some of us don't subscribe to the "market good, intervention bad" school of political philosophy. Sometimes artificial things are good. Telecoms companies are quite heavily regulated, has this prevented investment in telecoms infrastructure? No.

Your argument is presumably that over the years when mortgage lending was regulated, it would be less feasible to run a house building company, since while the costs of building were set by the market, the revenue is regulated. Therefore fewer houses or a worse quality of housing stock would result.

However, it is not the case that house prices were directly regulated. Only mortgage lending was regulated. If you and I were both bidding for a house, I could outbid you if I earned enough income. This would therefore drive up the price. What I could not do is outbid you by taking ridiculous risks with my finances.

By the way, if you are a strict advocate of the free-market, level playing field mindset, as a matter of principle, presumably you think that intervention should not encourage investment in property above and beyond the free market. The logical consequence of this is that capital gains tax should be imposed on primary residences, like it is on every other asset class.

frugalista

Edited October 12, 2005 by frugalista

[Elizabeth]

Dunno. Over priced? underpriced? that which we called a rose etc. But I thought I would add this one to this string rather than start a new one. Although the guide pricing this auction seems to be a little on the low side, the property was possibly a little overpriced in 2004 (55K). It will be interesting to see the results.

http://www.rightmove.co.uk/viewdetails-482...pa_n=6&tr_t=buy

Note its the first in the honour the order of the mortgagees

Maybe Baltimore was correctly valued at 500 times earnings and now is a huge buying opportunity?

Just saw that. That is really good.

Edited October 13, 2005 by Elizabeth

[mercsl]

Hi Sledgehead,

I did investigate other options but decided putting my eggs in one basket was the best approach for me. Maybe it was that chat with equitable life some years ago and soon after it went down the tube that jaded me I'm not sure. Escaped that but decided I really did not like middle men looking after investments for me. People on this board go on about diversification but most people have only so much capital to do that with, its no good diversifying a property portfolio with say just 20k in shares is it? What's the point? For every 100k invested in property how much would you need to put into other assets to effectively diversify your risk? Of course there is no guarantee your diversification strategy will be that effective anyhow. If I was a fund manager with millions I could afford to diversify:) Maybe some bear can inform us of what a diversified porfolio would look like for a BTL'r ?

My BTLs are doing ok, 3K a year profit on one and 2K on the other. Got them for a good price buying in winter both times to avoid the summer madness. They are not bland new builds, warehouse conversions with lots of character and one with a good view of the city and major landmarks. There are in SE1 which is getting a lot of investment in the next five years so I see them as a good bet. Rental demand is very good, just rented one out without using an agent within 2 weeks and got an increase in rent.

Nothing is risk free, just that I feel more comfortable with what I'm doing.

Edited October 13, 2005 by mercsl

[Guest Bart of Darkness]

Overvalued. Yes.

Thank goodness we all came to our senses a few years ago.

Now houses are correctly valued.

Shame about the transaction rate though!

[Time to raise the rents.]

A question for the HPC bears.

In past decades have house prices been undervalued?

All the charts and arguments have been why house prices are overvalued now but the flipside is to prove why they were priced correctly in the first place.

My own thoughts are that they were quite undervalued due to inefficencies in the UK banking market, housing policy and draconion rental laws. Bears constantly hark back to the past and their 3.5 times salary but was the market then just as artifical as bears claim it is today?

When I came from Australia I was suprised how backward UK banking was especially in regards to lending for rental properties and the products available. It was hard enough just getting a bank account. Rental laws were madly on the side of the tenant which led to no investment in decent rental properties. There IS a housing shortage...a shortage of houses people actually aspire to live in.

Things ARE different now and we will not be going back to the past. Come on bears prove they were not undervalued.

Don't bother.

I've been trying to convince the HPC bears of this reality for over a year now. It's like banging your head against a 500 ft tall brick wall.

[Guest Bart of Darkness]

I've been trying to convince the HPC bears of this reality for over a year now. It's like banging your head against a 500 ft tall brick wall.

Feeling unappreciated are we?

[TheEmperorHasNoClothes]

Don't bother.

I've been trying to convince the HPC bears of this reality for over a year now. It's like banging your head against a 500 ft tall brick wall.

He he! You are on a bears website! What do you expect?

I will humour you - lets say the new HP ratios are a perminent reality. Still it isn't 'time to raise the rents'. As a tennant i'm enjoying paying the same rent to live in the south-east (in real terms) as I did to live in the midlands 4 years ago. Great stuff! Keep lowering those rents landlords!!

So if 5x, 7x and 10x house prices are the new reality, and smaller and smaller rents are the new reality, why, I think i'll rent forever. Then when I have saved £100000 i'll let it sit in the bank earning me £4000 a year which will pay my rent for a decent house.

[King of the castle]

But joking aside, you do have a serious problem merc.

People like you say it's okay that FTBs are priced out / get better value renting as BTLs will "snap up" props and maintain demand, thus prices. By BTLs you presumably mean investors. The thing about investors is.........<ya da ya da yada>

I never quite grasp how people like you focus on only 6% of mortgagees. You're too investor focused in a non investor dominated market mate. You see that's how I'm right and you're plain old fashioned wrong. Stick with your charts, CFD's, calls and whatever TF and leave those who know what they're talking about to comment.

Let me put it another way : booms never end in a sigh of relief

KOTC

[jpidding]

He he! You are on a bears website! What do you expect?

I will humour you - lets say the new HP ratios are a perminent reality. Still it isn't 'time to raise the rents'. As a tennant i'm enjoying paying the same rent to live in the south-east (in real terms) as I did to live in the midlands 4 years ago. Great stuff! Keep lowering those rents landlords!!

So if 5x, 7x and 10x house prices are the new reality, and smaller and smaller rents are the new reality, why, I think i'll rent forever. Then when I have saved £100000 i'll let it sit in the bank earning me £4000 a year which will pay my rent for a decent house.

I agree TEHNC, I'm coming round to the idea that if idiot landlords are prepared to offer me property for 3.5% yield (less tax, maint etc etc) whilst I can get 5% net in my ISA, then I'm happy to keep renting.

The only reason I would want to buy would be if I thought that there would be inflation-beating rises in capital, ie prices start rising at 4%+ PA. I cant see this being the case. Yes, you might get the odd blip due to SIPPS, IR reductions (not much scope here right now though), but if things keep dragging on the way they are I'm happy renting, saving a packet and being risk free & flexible.

At some point other assets will offer yields of 10%. At the moment bonds etc offer low yields due to percieved low risk. This has been pointed out by Alan Greenspan as out of line at the moment, ie there is not enough risk being priced in. The same is the case for housing.....land lords dont see the risks of higher IR's or falling prices, cos they have short memories . The "its differnt this time" mentality is still strong.

Personally I hope the BOE drops rates to 4% by Xmas. Everyone will have the last push for the holiday season, re-max out their cards and then when sterling pukes and inflation runs wild early next year, rates will start chasing inflation. With the 2 year lag effect between IR's and inflation it will be too little, too late.

Time to move my deposit out of steling me thinks.

Blimey this post ended up longer than I intended.

James.

[theChuz]

Don't bother.

I've been trying to convince the HPC bears of this reality for over a year now. It's like banging your head against a 500 ft tall brick wall.

ahhh welcome back, good break?

[non-FTBer]

A flipside of this argument is that all of the BTL crowd will buy up the FTB properties if prices fall, and yields stack up better.

A bad argument IMHO. As the house prices fall and FTBs start buying back into the market rental demand will fall, which will probably cause a reduction in achievable rents and hence I would not be at all surprised if yields fall as prices fall (with a slight lag).

There is no point in buying more BTLs at a cheap rate if the rental market is already saturated.

The market in my area is quite saturated now. Same properties advertised to let for weeks/months on end.

If prices fall, and some of the FTBs who currently rent then buy, then the rental market will be more saturated not less.

There is no point in buying a BTL property if you can't let it out.... thats why its called Buy To Let stoopid!

[Time to raise the rents.]

He he! You are on a bears website! What do you expect?

I will humour you - lets say the new HP ratios are a perminent reality. Still it isn't 'time to raise the rents'. As a tennant i'm enjoying paying the same rent to live in the south-east (in real terms) as I did to live in the midlands 4 years ago. Great stuff! Keep lowering those rents landlords!!

So if 5x, 7x and 10x house prices are the new reality, and smaller and smaller rents are the new reality, why, I think i'll rent forever. Then when I have saved £100000 i'll let it sit in the bank earning me £4000 a year which will pay my rent for a decent house.

What you've enjoyed is your landlords ability to pass on lower rates to you. As prices increase (and therefore the desired rent forming the yield changes) & rates rise as well, those lower costs evaporate & guess what? You are targeted for rent rises to make sure the property returns its due.

If you think you're immune, think again. If your landlord feels they can't raise the rent on that particular property, the days until it is sold are numbered. You'll then get a kick in the teeth (financially) from your next landlord.

I have no objection to your desire to be a tenant forever though, how could I be a landlord forever without people like you?

[CommonSense]

Things ARE different now.

Yes, things are different, yes.

Yes, IRAQ does have weapons of mass destruction, yes.

Yes, the war was about freedom and not oil, yes.

Yes, Labour is tough on and crime and tough on the causes of crime, yes.

Yes, everything is fine in the economy, yes.

Yes, house prices will never fall, yes.

My advice to you is to spend, spend, spend! The days of opulence have only just begun!!!

Remember, the more you are in debt, the more your peers respect you! Just do it!

[eric pebble]

Yes, now that anyone with a pulse can borrow what they want until they bankrupt themselves, commit fraud, and take speculative punts with mind-boggling amounts of borrowed money, property has now reached its true value.

It was only communist-style interferring and damaging regulations that kept property from reaching the true value it enjoys today.

"Yes, now that anyone with a pulse can borrow what they want until they bankrupt themselves, commit fraud, and take speculative punts ...."

Yep: FRAUD - that is the key. I think the really pivitol, amazing moment in this whole Pyramid Selling Scam [the "Housing Market"] was that programme on Mortgage Fraud done by The Money Programme - http://news.bbc.co.uk/1/hi/business/3222053.stm & - http://news.bbc.co.uk/1/hi/business/3478635.stm - & - http://www.whereveryouare.org.uk/weblog/ar...2003_10_26.html -

That just showed us what has REALLY been going on!! "Self-cert" mortgages - where you just lie and double/tripple your salary on the "advice" of the mortgagor!!!! -- THAT kept the whole Pyramid Scam going for about 18 months to 2 years extra - and really fuelled the bubble we have today .... a bubble that has now got a hole in it - and which is actually deflating rather than popping as the VI's keep an air supply going in....... but inthe end..... they will not be able to stem the flow outwards.....

"Yes, now that anyone with a pulse can borrow what they want until they bankrupt themselves, commit fraud, and take speculative punts ...."

Yep: FRAUD - that is the key. I think the really pivitol, amazing moment in this whole Pyramid Selling Scam [the "Housing Market"] was that programme on Mortgage Fraud done by The Money Programme - http://news.bbc.co.uk/1/hi/business/3222053.stm & - http://news.bbc.co.uk/1/hi/business/3478635.stm - & - http://www.whereveryouare.org.uk/weblog/ar...2003_10_26.html -

That just showed us what has REALLY been going on!! "Self-cert" mortgages - where you just lie and double/tripple your salary on the "advice" of the mortgagor!!!! -- THAT kept the whole Pyramid Scam going for about 18 months to 2 years extra - and really fuelled the bubble we have today .... a bubble that has now got a hole in it - and which is actually deflating rather than popping as the VI's keep an air supply going in....... but inthe end..... they will not be able to stem the flow outwards.....

And guys - half way down the page - ... http://www.whereveryouare.org.uk/weblog/ar...2003_10_26.html

- this says it all: This was 2003/04 -- an INDEPENDENT programme on BBC2 i.e. free from the usual VI BBC - Bias Broadcasting Corp - [The Money Programme] - but this really summed the whole thing up - this was a really really EXCELLENT piece of investigative journalism - and if you can - get a look at this programme - it is a real CLASSIC...

Stick a couple of noughts on that, eh?

BBC News: Mortgage customers 'urged to lie'.

I've promised myself that I'm not going to engage in another rant about the housing market, which is what I invariably end up doing when I discuss the subject. So I'll attempt to keep the following entry mercifully calm and level-headed.

Flicking through the TV channels tonight, I happened upon The Money Programme on BBC2. Yes, you're right, I'm not exactly a regular viewer. In fact, I can think of nothing more dull than watching The Money Programme. But I suddenly realised that my street was on the telly - look! It's Ealing! That's where I live! - and I remembered seeing cameras here a few weeks ago.

Once that claim to fame had passed, the programme went on to reveal the scandal of 'self-certification' mortgages, where potential borrowers are being encouraged to lie about their salaries in order to increase the amount they can secure to purchase a property. Undercover filming showed slimy estate agents (and sorry to propagate a stereotype, but they were all slimy) advising customers to sometimes double what they said they earned, because mortgage lenders would be very unlikely to check - and frankly, mate, that's the only way you're going to be able to afford somewhere at today's sky-high prices.

By this stage, I was sitting on the edge of my sofa with my eyes popping out of my head. But it was about to get much worse.

A couple of expert financial analysts were wheeled on to explain that this fraudulent behaviour, far from involving only a few isolated cases, is now extremely common. Indeed, it could explain why, confounding all predictions of a decline, property prices have continued to rise:

"Over the past two years, most forecasters . . . expected the housing market at best to stabilise and more likely to fall. Instead it's powered ahead. Now clearly if there is this extra flow from these fraudulent self-certified mortgages, that will push hundreds of millions of extra cash flow into the housing market. So you get this sort of self-feeding frenzy, a real bubble effect."

My shock turned to mild apoplexy at this point.

Every time those bewilderingly differing reports on the state of the housing market are published, I find myself wondering - incredulously - how anyone attempting to clamber their way onto the first rung of the housing ladder can even begin to afford the prices being asked for the grottiest little studio flat. And now it turns out that it could all be down to plain old criminal fraud. What a wonderful basis on which to make the most important purchase of your life.

Maybe I'm too innocent in all these matters, but the scales have certainly fallen from my eyes tonight. The programme concluded by suggesting that if such fraudulent dealings are now under investigation it may, when combined with a predicted imminent rise in interest rates, lead to that long-awaited down-turn in the housing market, and a return to prices that aren't just fairytale stuff to many of us.

I live in (distant) hope, but experience tells me not to hold my breath.

Edited October 13, 2005 by eric pebble

[Tempest]

We had relatively low interest rates in the 50s and 60s and ended with the house price boom of 1970-1973 where the HP to earning ratio went to 5 times (4.95 I believe). That was higher than the late 80s peak multiple (but shy of where we are now). The now legion BTL brigade and private investors did not fuel that boom - what is to say prices were not fairly valued then (when yields would have been just as low if not lower given the rent controls existing then)? Because post '73 oil spike people realised house prices would eat up too much of their disposable cash and things returned to trend. If you push the multiple too high and the other essential costs in one's life increase there is only one way for HPs to go.

Just wait for compulsory pension contributions - they are coming. Added to the wealth of tax rises and inflation some anticipate over the next few years Mr and Mrs Average are going to be squeezed cash flow wise.

I am all for property having a place in the portfolio but in balance. I am trying builld up all my ISAs over the next few years while things stagnate in expectation of a long term stock market upturn from 2009 - compulsory pensions would have a permanent massive upwards shift in equities I think if it materialised (somewhat to the detriment of HPs).

Edited October 13, 2005 by Tempest