Market Is Heading For A Crash

[200p]

I meet a lot of people who read the Mail. For them it is the GOSPEL.

The housing market is driven by sentiment (we have always advocated this on HPC), a few more of these articles and there will be panic, abit like the fuel panic we saw last weekend.

Oh, anyone driving through Lyndhurst this Easter, you won't fail to spot all the "For Sale" signs when driving through. They sprung up in numbers like the daffodils!

[The Masked Tulip]

Someone must have read the Daily Mail

http://www.rightmove.co.uk/property-for-sale/property-21220359.html;jsessionid=AED2E2E2B746F1A2CA2A7476A395609A

06 April 2012 12:18:42

Status changed: Sold STC Available

05 April 2012 09:00:28

Status changed: Available Sold STC

Edited April 6, 2012 by The Masked Tulip

[Josieful]

This is unusual for a Daily Mail article. Perhaps they are seeing the light! I am not sure if they are willing to go as far as the "lost decade" thoughts below.

http://www.mindfulmoney.co.uk/wp/shaun-richards/uk-house-prices-are-heading-for-an-affordability-crunch-and-a-possible-lost-decade/

It looks like there is trouble ahead for UK house prices...

Thanks I enjoyed the link with the bit on the fall in real wages and incomes and the implications for future house prices being particularly interesting

[southeast]

A well presented and spacious four bedroom detached house built by 'Bewley' Homes approx. 3 years ago and situated in the popular location of Spencers Wood. (They tried to sell the house for £489500 in 2006 but no taker)

New build...once you move in the price will drop 20% or so.

I know sometimes new properties lose a bit as people have paid a premium, but this seemed like a lot to me considering the timeframe.

Edited April 6, 2012 by southeast

[Bland Unsight]

Don't see too many graphs tagged "Property of Planet Ponzi" either.

[erranta]

http://www.dailymail...o=feeds-newsxml

I just found this jewel...

The simple fact is that, while our real economy stagnates or falters, we live with a property market almost as hot as it was in the burning heat of 2007.

Complete ******** - cos the market is affected by selling prices of a few thousand houses today (people exchanging for job moves?) - whilst 10,s thousands a month were selling in 2006-7

The Govt also injects Billions to hold up prices thru hidden incentives to overborrowed, Mortgage Guarantees to pull in the last suckers + £75,000 'reductions' on massively overpriced council houses to entice some of the most financial illiterate during the last moments etc

[Debbie568]

You may need to pardon my ignorance but is the calculation suggesting that a £190k investment property rented out to LHA tenants at £9,540 pa makes a return?

The LHA per annum figure gives £795 pcm to the landlord.

From a repayment perspective, if you could borrow 75% LTV 4.5% there is almost no return - £9,540 rent vs £9,504 interest on the mortgage, (MSE repayment calculator suggest £792/month on 75% of £192k). Once base rates come back up, and they will over a suitable investment horizon for a BTL, and you're paying 6%, you're already deep under water.

None of this makes any allowance for voids, maintenance, letting agents fees, let alone prices moving against you.

If you finance 75% LTV IO at 4.5% your monthly interest charge is £146,250 x 4.5% = £6,581 pa, giving £548 pcm. On that calculation you're making the difference between £795 and £548, which is about £250 pcm, or £3,000 pa. That's about 1.5% of the assets employed (£195k) so a 2% drop in house prices wipes out about 18 months of your income on the interest spread, and for all the time effort and worry, you haven't made a penny nor made any allowance made for voids, maintenance and letting fees, let alone the aggravation of having a tenant.

Gross yield for a BTL is defined as rent divided by house price but with yield defined that way a multitude of sins are hidden. I think that sometimes people compare gross BTL yield with the rate that you get at the bank, which is extremely misleading because most of us don't have to finance our savings with borrowings, and our savings cannot lose their nominal value.

If we assume that a 10% gross yield is needed to make my 25% deposit return anything worth having, and I need to price in say 2% for interest rate volatility, (rates can only go up from here!), and another 3% for falling house prices, I really need a gross yield of maybe 15%, and I'm still in real trouble if interest rates above 6% or prices fall by 10%, let alone both happening, which is a definite possibility, to say the least!

By my reckoning LHA of £9,540 pa will give a gross yield of 15% when the 3 bedroom house sells for £63,600. Prices may not go that low, but the LHA you quote won't keep them at £130k.

But the main buyers of houses are people who want to live in them, not landlords. So the housing benefit drives all prices, not just of houses and flats suitable for BTL. say you are renting a place for £9,500 per annum. Not because that's a reasonable rent but because that's the LHA, so landlords want at least the LHA before they will rent out the property. It's likely that the most desirable properties are not BTL. At what point would you, currently throwing money down the drain, consider entering the housing market on your own account?

If you could get a 100% mortgage, which you currently can't, assuming you don't want to finance any outstanding balance via a credit card or a personal loan, at £190k, as you point out, you are swapping rent for interest. But you get to live in your own home, possibly a nicer home in a nicer location than the one you are renting. Maybe even slightly bigger.

Is a landlord going to buy the property in question for £190k? I agree with you; probably not. Even when he's borrowed on a 75% LTV so 75% are not his funds employed. Using your calcs, even if he walks away with £250 a month clear on his £50k investment, it's still not a very good return; really not worth the grief in a falling market, however slightly it currently falls.

But someone who is renting and looking to buy? Maybe. If they have a deposit, currently languishing away in some 4% per annum savings account, before tax to add to the misery, that £190k buying price might look like a bargain.

[Debbie568]

The simple fact is that, while our real economy stagnates or falters, we live with a property market almost as hot as it was in the burning heat of 2007.

Complete ******** - cos the market is affected by selling prices of a few thousand houses today (people exchanging for job moves?) - whilst 10,s thousands a month were selling in 2006-7

The Govt also injects Billions to hold up prices thru hidden incentives to overborrowed, Mortgage Guarantees to pull in the last suckers + £75,000 'reductions' on massively overpriced council houses to entice some of the most financial illiterate during the last moments etc

Not just mortgage guarantees. Shared equity, shared ownership, rent to buy, all kinds of schemes they have subsidising builders to get them to offer crazy deals to would be purchasers. The government seems terrified of allowing the property market to fall. I'm guessing they want to keep the bubble inflated until they divest themselves of their shares in the banks?

Unless they want to see a massive devaluation of the pound against other currencies, which is inevitable if they keep QE-ing like there's no tomoorow, sooner or later they are going to have to bite the bullet, cut benefits massively, both in terms of who has access to them and the quantum, and go the way of Spain and Ireland, letting the housing market fall to whichever level the taxpayers (i.e. the ones who might have some savings and be able to get a mortgage, so are potential buyers) let it fall to.

Yes, that might well mean the kind of overcrowding you are getting in Ireland at the moment, with whole families moving back into Mum and Dad's because they've lost their homes. or families who rent being forced to live 4 people to a one bedroom flat. But if the government don't want that, better they free up some land and build social housing than continue to fleece already struggling taxpayers at the rate they are currently doing.

If it were only income tax, then maybe the rates are okay. But add in fuel tax, VAT, artificially high utilities prices, train prices that down south are so expensive, it's a wonder anyone can afford to use them, road tax, council tax, - it seems never ending. It's not like people who are working can choose not to use things like transport. We don't all live a walk away from work. No wonder so many British taxpayers emigrate!

[Bland Unsight]

But someone who is renting and looking to buy? Maybe. If they have a deposit, currently languishing away in some 4% per annum savings account, before tax to add to the misery, that £190k buying price might look like a bargain.

Maybe - there is always someone who is willing to buy if someone is willing to lend.

At the moment, because rates are in the basement and the lenders are trying to imagine a way that they can get out of this mess they might lend a fair chunk, but whatever happens to base rates, savings rates and mortgage rates are ticking up, and every 0.5% knocks a big chunk of the what you could borrow to buy a house and makes savings interest a bigger contribution to paying the rent.

Falling house prices and a glut of supply will also pull rents down.

If prices fall persistently for years people will become more risk averse about jumping into housing. An asset with a falling price always looks like it will be a better bargain next week. These bubbles are products of feedback loops - one set for the way up, and another set for the way down. The conventional wisdom is that the correction usually goes too far.

What arrested the last set of falls in London and the South East was not the fact that house prices looked like a good deal, it was a change in the amounts people could afford to borrow. That changed because mortgage rates were slashed as the BoE eviscerated the base rate, but that can't happen again because you can't get much lower than 0.5% without paying people interest on borrowings, and that way lies madness!

[NEO72]

Not just mortgage guarantees. Shared equity, shared ownership, rent to buy, all kinds of schemes they have subsidising builders to get them to offer crazy deals to would be purchasers. The government seems terrified of allowing the property market to fall. I'm guessing they want to keep the bubble inflated until they divest themselves of their shares in the banks?

If this is the case, then not extending the FTB stamp duty break, increasing SD on £2m+ homes and trying to encourage increased supply via NewBuy seems a pretty dumb way to go about it.

[NEO72]

But someone who is renting and looking to buy? Maybe. If they have a deposit, currently languishing away in some 4% per annum savings account, before tax to add to the misery, that £190k buying price might look like a bargain.

Presumably it would have looked like more of a bargain last year though with cheaper mortgage interest rates and possibly no stamp duty. So the question is how many potential buyers less bearish than us lot (ie the majority of them) dived in then? And more importantly - how many are left to prop things up?

[Bland Unsight]

If this is the case, then not extending the FTB stamp duty break, increasing SD on £2m+ homes and trying to encourage increased supply via NewBuy seems a pretty dumb way to go about it.

+1

They are looking across the channel, the Atlantic and the Irish Sea and they see one story. Pop!

Nobody is trying to stop this bubble collapsing, but no one wants to be standing there holding the pin and cheering when the deed it done.

This bubble has run out of friends.

"Et tu Crustus?"

[djgilbo]

The crash wants to hurry up and crash so house prices fall even further giving first time buyers a chance to get on the market when house prices fall to an affordable price.

[Debbie568]

Maybe - there is always someone who is willing to buy if someone is willing to lend.

At the moment, because rates are in the basement and the lenders are trying to imagine a way that they can get out of this mess they might lend a fair chunk, but whatever happens to base rates, savings rates and mortgage rates are ticking up, and every 0.5% knocks a big chunk of the what you could borrow to buy a house and makes savings interest a bigger contribution to paying the rent.

Falling house prices and a glut of supply will also pull rents down.

If prices fall persistently for years people will become more risk averse about jumping into housing. An asset with a falling price always looks like it will be a better bargain next week. These bubbles are products of feedback loops - one set for the way up, and another set for the way down. The conventional wisdom is that the correction usually goes too far.

What arrested the last set of falls in London and the South East was not the fact that house prices looked like a good deal, it was a change in the amounts people could afford to borrow. That changed because mortgage rates were slashed as the BoE eviscerated the base rate, but that can't happen again because you can't get much lower than 0.5% without paying people interest on borrowings, and that way lies madness!

Maybe people will start to shy off housing, regardless of their deposits or the willingness of the banks to lend to them. For most people, if banks are only prepared to lend 3.5 times earnings, that's really not going to buy very much even with, say, a 30% deposit. I'm just not sure that rents will come down quite so quickly. Maybe at the non housing benefit end of the market, where people are 100% driven by what they can afford rather than the LHA. But even with the cut in the LHA, this is still going to drive prices in a large part of the market, including for people who are not getting any help from housing benefit. Plus our population is spiralling ever upwards. People have to live somewhere.

Was it a change in the amount people could afford to borrow or also the fact that they could just state whatever income they liked, not enough questions asked? A lot of mortgages written prior to the recession - I've seen estimates ranging from 30% - 50% of all loans - were liar loans. There must already, if job losses in recent years are any indication, be a lot of these kinds of loans in arrears. Sure, we haven't seen the foreclosure actions you get in somewhere like the States to any degree - yet. Mortgage assistance, unlike housing benefit, doesn't appear to be open ended. Well, is it? if yes, then while the people are out of work presumably their mortgage interest will be paid by other taxpayers. But if it's limited, I wonder how long the banks will be able to hold out for, especially once interest rates go up, before foreclosing on some of these properties. If rates go up, their cost of borrowing will also rise. They could well decide, as those in the States did, that they are better off with £50k of something rather than £200k of nothing.

[Debbie568]

If this is the case, then not extending the FTB stamp duty break, increasing SD on £2m+ homes and trying to encourage increased supply via NewBuy seems a pretty dumb way to go about it.

I suppose with newly built homes, if they can keep those prices up it will help to keep the second hand home market up as well.

The hike in stamp duty on £2mill+ homes is just the Tories trying to make themselves look a bit less Tory by going after people with deep pockets. Same with the limit to the amount of donations you can deduct from your taxable income - not what you can give, I note, but what you can deduct . This seems to be an attempt to limit the amount of tax that can be clawed back on these donations to 28% or whatever it is the charities can claim back through gift aid, and then only to be available (for amounts in excess of £50k) if the charities are the ones clawing it back.

Even the end of the FTB stamp duty break could be made with the right political spin, to look like they are limiting the ability of the relatively well off (which you would have to be these days to buy a house, i.e. tens of thousands in savings salted away for the deposit) to avoid taxation.