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Bull Challenge - Come on convince me!


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The great housing debate has just about been done to death, but I have yet to have a satisfactory answer to the following:

If FTB's are having to borrow extreme amounts of money to get on the property ladder, so much so that most cannot now afford to do so until their mid 30s, then why is it that the market should conitune to hold its value?

The argument may go that BTL snap up the cheaper FTB properties. But if they do you don't get rid of FTB's they just become FTB's later, say in their 40s. There is simply a time lag. The FTB now competes directly with the BTLs for the bottom end properties but at an older age, so the BTLs have to pay more, if they can, the FTB then has to wait until he's older, and so on and so on. If the cycle persists who then can have the capital to BTL? The older ex-FTB's can't turn to BTL as they have an inflated debt to pay off in the value of their house. No more BTL's and the market cannot prop itself up at the bottom. The cycle can therefore simply not be sustained in the long term....

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.....[continued]

Added to that if FTB's are forced out of the market by the huge amounts they'd have to pay in mortgage repayments, then wouldn't it hold that the 'new' BTL'er would also have to pay these high mortgage repayments? If he does then surely he must cover this by making sure his rental return exceeds these payments. But the FTB couldn't afford the mortgage repayments in the first place, so how can he now afford the inflated rental returns? The prospective FTB therefore cannot rent at that price and drops out of the rental market, forced into relocation or staying at home with the parents etc.. The BTL cannot therefore make his rental return, and because of the first argument above cannot make and asset inflation. The investment therefore is a non starter.

Markets only work stably over longer periods when the value of a product is within the majority of the buyers budget. BTL can by definition only be a transient phenomenon in an ever rising market (if adjusted for general inflation). Rember todays FTB is tomorrows BTL if the cycle is to be kept stable, and BTL rental returns have to at least match the mortgage repayments available at the time that the now 'new' current FTBs can't afford.

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[continued. . .]

So how is it possible for the majority of people to hold a market at a level which is out of reach of the same majority of people? Clearly nonsensical.

So general inflation has to rise while house prices stay stagnant, or a crash has to happen. Either way house price values have to fall in the short to medium term.

So come on bulls, tell me how the market can continue to rise or stay static in real terms?

It's simply not a question of whether real house prices will fall, but when and how much. I think sometimes we get so caught up in predicting a crash or a boom we forget this.

[End: Damn office firewall!]

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TheBear,

True, and a point I've been ,aking for a while. The bulls cannot provide a rational argument to back up prices being sustainable at this level through BTL. Heck, if I put a bull-hat on temporarily and try to think of any way that what you describe above could be financially sustainable I really can't.

Btw - Arguments like "Interest Rates are low" or "Employment is high" or "there's a shortage of property" contribute no justification to the argument in any way.

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A bullish stance is the consequence of panic and emotion coming together and forming irrational thought. The facts are hastily emerging, house prices are going to fall, the percentage fall will differ from area to area, with those areas seeing the greatest gains in the shortest period suffering the most.

My point is this, there must be a correlation between salaries and house prices.

The boom has been created part by a herd mentality but more importantly, low interest rates. Its easy to borrow £150,000 at 3.5%, buyers concerns have not been the high prices, but the % of disposable income available to service mortgage repayments.

It is highly probable, that within 12 to 18 months, market correction will reduce house prices across the country by an average of 20%, the market needs FTB's to return, to sustain the cycle of buying and selling, allowing people affordable homes, and for more affluent middle aged people to upgrade, at the moment, the fundamental economics are not sustainable, anyone who has bought within the previous 6 months, with the intention of turning a quick profit will be disappointed, anyone contemplating buying within the next 6 months should be prepared to bargain hard.

A correction should be welcomed, only the BTL's need panic, the rest of us looking for homes rather than profit will be breathing a little easier come the spring.

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I was walking my dog the other day and it hit me. When laws on tenancy and landlord tenant relationships changed, the fact that tenants could no lonnger rely on taking over their landlords property ( a free meal ) coupled with councils reducing their stock by selling off to their tenants, the market changed even more than I realised.

In another post, I estimated 21% of the population was govt tenants when the reforms started.

Those 21% of the population then had to be divided up into groups. If we used the old %'s as a guide, 72% would choose owner occupation (maybe buying their council place), 7% would choose private rentals and 21% would still be in the market as people that couldn't afford either, or chose not to pursue either choice.

Couple all of the above with IR's dropping and other factors naturally.

Anyone still want to argue that this wasn't an important event?

Here's the link again:

http://www.housepricecrash.co.uk/forum/ind...?showtopic=1647

Sorry to the people who've seen me use this link twice before this morning.

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TTRTR – OK apologies but this is a long post, I felt your thread link deserved a proper reply so please read it all if you can!

If I understand you argument properly after reading the thread you quote your reasons for sustainable prices are mainly two fold:

1. There was a time in when the majority of the populace chose to rent and OO was not the norm. OO was therefore just a temporary fad (in the great scheme of things) since the 50s.

2. The current BTL market will mature to a seasoned market where BTL are willing to subsidize the first 5 or so years of investment with their own money, much like paying into a pension, after which their investment will mature and start paying a steady return as rental values increase to cover more than the cost of the mortgage, management and repairs.

Your hallelujah market, therefore, would be a lower market dominated by landlords, who would provide quality rental properties to the overwhelming majority of the populace who would choose to rent from them rather than buy.

This presupposes three things.

1. The majority of the populace will prefer to rent or will be forced to rent as they are priced out of the market – your customer base.

2. Rental values will continue to rise at a rate high enough to beat other standard investments – the attractiveness of the investment. Your markets supplier base.

3. The investment property will rise in asset value at either a rate at least equal to general inflation plus costs, so that it can be sold at least for the same price that it was bought or at a price that would still make the return made from rental attractive – your end market churn and therefore ability to attract new BTL blood.

So can your market have a stable customer base?

Well it is true that people used to choose to rent as it was cheaper and easier to achieve. So it could be conceivable that they might choose to do so again. However, there has been a consistent attempt to change the tenant into the OO by successive governments since the 50s so it cannot happen overnight and would require some fundamental changes in policy to change the communal perception of “renting bad, OO goodâ€. In addition the vast amount of social housing has now been sold off. Why? Because it was too expensive for the government to maintain, so any change in policy to encourage tenantship would have to encourage tenants into the private sector. As you pointed out TTRTR, BTL has been encouraged by shifting the power away from tenants to landlords. To encourage tenantship as a positive choice the shift of powers to the tenant would have to be made, which would in turn discourage BTL. Clearly this wouldn’t work.

So the only way your market can have a customer base is if the majority of the populace is forced to rent because rents are cheaper than equivalent mortgage repayments. In other words BTL competes with FTB and consistently raises property values outside their reach.

In the short term this would work well, but does pose two future problems, the attractiveness of the BTL investment, and the ability of the market to attract new BTL blood.

So is the BTL investment attractive?

Well after 5 or so years the investment must be making a positive return at least equal to other standard investments adjusted for risk. So if the investment made a negative return for a few years but now has to make a positive return this would suggest that either rental return has to rise or interest rates fall. If interest rates fall the asset value has to rise in order to keep it out of the reach of FTBs and supply your customer base. So you seem to make it back twice, first on falling repayments and then on increased asset values. However, interest rates cannot consistently fall or eventually they’d turn negative, and asset value profit can only be realized on exit from the market (selling the investment). Therefore your investment must rely on an initially increasing rental return which eventually tops out at a value at least equal to other standard investments adjusted for risk.

But if rental returns must increase, then asset values must also increase or soon rents would be more expensive than mortgage repayments and you would loose your customer base as FTB’s chose to buy rather than rent. But that’s ok as long as it’s only a single step increase in asset value over a limited period. This would be the case if you were the only BTl’er in the market and you never increased your portfolio, but the market requires new blood BTL’ers and you require more properties. So for every new property you buy and for every new BTL investor that enters the market as step change increase in property values must occur. In other words property values must consistently rise exponentially in order for BTL to remain profitable.

But even that might just work if the BTL market didn’t require many new entry investors or portfolio additions. The trouble is that IHT now exists and the population is rising, so new investors or portfolio additions are required in order to keep a stable market share and prevent FTB’s from buying.

So can your market attract these new investors?

In order for your market to work assets must consistently be seen to be increasing exponentially but with risk remaining comparable. Combining this with the increasing costs such as stamp duty means that the negative return period on BTL starts to rise. Why? Because the new entrant BTL must still compete with existing BTL’s who have already passed through their negative return period and therefore cannot raise rents exponentially. Therefore BTL slowly becomes less and less attractive.

But how about keeping it in the family as we did in the past? The trouble is IHT makes that very difficult. You cannot easily pass your assets from parent to child without loosing a substantial part of it.

So what’s the final analysis of your market?

In order for it to survive either the populace must choose to rent rather than buy or be forced to rent rather than buy.

The market is sustainable if the populace chooses to rent. However, that would require a change in social conditioning (which takes time) and a change in policy to attribute the powers of yesteryear to the tenants (which makes BTL unattractive). You might argue that the population is becoming more mobile so renting becomes more attractive to more people, but you must also then recognize that the easing of credit restrictions which make BTL attractive also make moving-to-buy more attractive for the mobile worker.

The market is unsustainable if the populace is forced to rent rather than buy simply because you must recognize the need for BTLs to replace FTBs within the market leads to an exponentially increasing market with no new entrants. BTLs must by definition therefore compete against FTBs for purchase and rental return, but today’s FTB has to be tomorrows BTL, so BTLs must eventually compete against BTLs to keep the price out of reach of the purchase range of BTLs – clearly ridiculous.

Finally what happens if your market stagnates? New entrant BTL’s cannot now cannot evolve from the negative return section of their investment cycle and so would choose to remove themselves from the BTL market. If you accept the need for BTL to compete with FTB for properties, you now must accept that BTLs would also compete with BTLs for property purchase. If your market now sees an increase in available properties from exiting BTLs then prospective BTL buyers will themselves drive the market down by attempting to obtain the best possible purchase price to maximize their rental return and minimize their negative return period. This would apply continually increasing downward pressure to asset values as simultaneously asset price is exposed to bearish market pressures and new entrant BTLs are blocked from entry into the market. Eventually the asset price would probably come within the range of FTB’s and your market collapses.

--------------------------------

There was a time when most people rented, but as you say times have changed. The encouragement of OO by more accessible credit, the introduction of IHT, the transfer of rights from tenant to landlord and the removal of social housing, have left us with a situation where it is has been simultaneously attractive to be an OO and be a landlord. Any change in the policy to make becoming a tenant rather than an OO attractive would make being a landlord less attractive and visa versa. This is always the problem with commercial housing policies.

So BTL can survive, but only for that section of the population that wants to rent rather than buy for good social reasons; but in the current situation the majority want to buy but cannot afford to, in this market BTL cannot provide the prop that is required to sustain the asset value.

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Your hallelujah market, therefore, would be a lower market dominated by landlords, who would provide quality rental properties to the overwhelming majority of the populace who would choose to rent from them rather than buy.

I stopped reading there. Because you OBVIOUSLY are having me on (as I didn't say the market would be dominated by landlords did I? - nor that the majority of the populace would rent?) and haven't really read what I'd spent so much time writing.

I'd love to have a real discussion, but you may not want to.

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TTRTR I really expected more of you than that last comment. Sad really.

If I read your post wrongly then please correct me with what your true hallelujah market. In fact your psot was so dissapointing that I am wondering if you know what an hallelujah market is? Its not a form of abuse, just what you would consider the perfect end point to your market transition.

The trouble is that if your hallelujah market does not consist of a majority rental market at the lower end, then it becomes impossible to argue that BTL can support current prices, if those prices are above the range of the majority of FTBs who would have to make up half the market for it not to be BTL dominated.

If prices stagnate until most FTBs can buy again, not only do you loose your current customer base, but your new BTL entrants and portfolio additions cannot evolve from their negative return period and gain positive investment return during that period. So the market temporarily collapses.

Hence, as I presume you to be a reasonably intelligent person, I assumed that what you were ultimately arguing for was a lower end market largely dominated rental properties, much as it was in the past, except that private landlords would take the place of the old social housing system.

You are extremely dissapointing TTRTR, I expected more. I wonder if you also "stopped reading" at the point just before it said "your property is at risk if you do not keep up repayments" on your BTL mortgage?

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TB - that may not even be the real TTRTR as I notice there is a '.' on the end of his handle. There's been a few incidents like this.

On the other hand TTRTR's does routinely dodge difficult discussion by refusing to read the posts, if he feels he's outclassed.

Swings and roundabouts really!

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TB - that may not even be the real TTRTR as I notice there is a '.' on the end of his handle. There's been a few incidents like this.

On the other hand TTRTR's does routinely dodge difficult discussion by refusing to read the posts, if he feels he's outclassed.

Swings and roundabouts really!

Its the real one alright you can tell by the number of posts.

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DrB - I believe you are probably right.

However, the hypothesis that BTL investors might choose to view a portfolio in a similar way to a pension fund of old has to be considered and followed to a logical conclusion. Sadly even when this logical conclusion is reached it simply shows that such a market would be unsupportable by the fundamentals.

I hope that in my lengthy reply to TTRTR's I was as fair as I could be, in that I considered all the points he raised and a few more to boot regardless of whether I think them to be correct or not.

Because of my job, I try to be objective in all things and so it is important to consider all possible views. If a hypothesis does not fit objective reality then it must be discarded, regardless of my personal feelings. Who knows we bears may well be very wrong, hence the reason for the original post - it really is a challenge to the bulls, I really do want to be convinced!

So far I haven't had one good or even sensible bull reply. I'm trying not to judge them on this but it is proving hard ;)

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TB, I was in a hurry to go somewhere and TBH I find it frustrating and annoying when people reply implying that I've said things that I haven't:

1. There was a time in when the majority of the populace chose to rent and OO was not the norm. OO was therefore just a temporary fad (in the great scheme of things) since the 50s.

Did I say OO was a temporary fad?

2. The current BTL market will mature to a seasoned market where BTL are willing to subsidize the first 5 or so years of investment with their own money, much like paying into a pension, after which their investment will mature and start paying a steady return as rental values increase to cover more than the cost of the mortgage, management and repairs.

You seem to have understod what I was implying.

Your hallelujah market, therefore, would be a lower market dominated by landlords, who would provide quality rental properties to the overwhelming majority of the populace who would choose to rent from them rather than buy.

Hallelujah market? This is where you get offensive. Notice?

Where did I say this:

provide quality rental properties to the overwhelming majority of the populace

Nowhere, sounds like you haven't bothered to read what I've written.

Frankly, the rest of what you've said is just waffle based on your own thoughts and a lax attempt at reading what I've written. It seems to me that nobody could convince you, but I'll ***** a little hole in everything you've said:

You're correct, the desire to be an OO won't change. I never said it would, that was your own interpretation. Because the OO desire won't change, landlords will only benefit by the mass desire to buy property over a persons lifetime.

That my friend is what the future holds, people competing for property as they have done in the past. BTL hasn't changed that, it's made the need mor intense by the fact that landlords can kick their tenants out & sell into the future market, something that was difficult for landlords of the past restrained by old school laws.

If I were you, I'd go back and rethink pretty much all of what you said. In particular, your mention of the customer base etc. We are beings with a life cycle, during our 20's is the time most of us rent, just because a person buys for example at 30, doesn't mean the customer has gone anywhere, there are plenty of new people coming up the ranks.

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Dear oh dear oh dear TTRTR, you are clearly not the businessman you think you are and your posts just seem to get more abusive.

Hallelujah diagrams and projects are common terms used in business, science and IT. They define the overall desired goal after a transition period. For example, if you are performing management for change, you might have several projects for change running in a number of departments across your business. All these projects are part of the overall Hallelujah Diagram which is the desired end product of the culmination of these projects. All I did was apply the term to an emergent market which would seem fair and just, if you find it abusive I apologise - but please increase your personal dictionary a litte before you start insulting people! Hey, I even said it wasn't abusive but yet you still chose to take offence - mad!

What I can't believe is that you say:

Where did I say this:
QUOTE

provide quality rental properties to the overwhelming majority of the populace

Nowhere, sounds like you haven't bothered to read what I've written.

You would prefer to let inferior properties in bad condition? I was actually trying to be flattering and not cause offence. You are an interesting guy TTRT but I think you do protest too much!

However, your apparent attempt to ***** a hole in the argument is interesting. You suggest all that is needed is for competition to continue. Sadly this just draws you back to the original problem to which I tried to answer your question unabusively and with sincerity.

So then why not answer the original question:

Markets only work stably over longer periods when the value of a product is within the majority of the buyers budget. BTL can by definition only be a transient phenomenon in an ever rising market (if adjusted for general inflation). Rember todays FTB is tomorrows BTL if the cycle is to be kept stable, and BTL rental returns have to at least match the mortgage repayments available at the time that the now 'new' current FTBs can't afford.

So how is it possible for the majority of people to hold a market at a level which is out of reach of the same majority of people? Clearly nonsensical.

So general inflation has to rise while house prices stay stagnant, or a crash has to happen. Either way house price values have to fall in the short to medium term

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TTRTR - the only person being abusive in this thread appears to be you:

Frankly, the rest of what you've said is just waffle based on your own thoughts and a lax attempt at reading what I've written
I stopped reading there. Because you OBVIOUSLY are having me on (as I didn't say the market would be dominated by landlords did I? - nor that the majority of the populace would rent?) and haven't really read what I'd spent so much time writing.

I'd love to have a real discussion, but you may not want to.

Sadly it is you who appears not to want a real discussion.

What TB is saying is that the customer doesn't go anywhere just as you said. This means he will still be there to compete with the BTLs but just later, when he's older. So in order to keep prices out of the FTBs reach BTLs will have to raise them even more. Ths means rens have to go up to cover the extra outlay of the increasing property price. But the younger customers in their 20s are still there and cannot take those rents so you loose them. BTL (like any other product) needs customers to need BTL ~ are you insane???

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Hallelujah diagrams and projects are common terms used in business, science and IT. They define the overall desired goal after a transition period.

That's nothing. Over on singing pig some guy was asking why he should use "CPA on Project" to run his property development, as he didn't really know what it was. Out of all the "really serious" property developers that site is supposedly packed with, not one put forward a single knowledgeable reply. One idiot (think his name was yieldman) said he had no idea why one needed a Certified Public Accountancy qualifiaction to develop a property! I didn't have the heart to tell them the guy should research critical path analysis and then use Microsoft Project to implement it. they'd only have said "analysis-schmalysis : analysis paralysis!" or some such...

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I didn't have the heart to tell them the guy should research critical path analysis and then use Microsoft Project to implement it.

DAMN!!! if only i'd known about this i could have made another few million, instead of the measly millions i made instead.

the only critical path , i need on my properties , is the one that leads to the front door, to let my tenants in, and to collect my rents, thank -you very much. ;)

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But the younger customers in their 20s are still there and cannot take those rents so you loose them. BTL (like any other product) needs customers to need BTL ~ are you insane???

WTF is this all about?

Kiddies I have a family to look after & I honestly haven't got all the time in the world to go round in circles with you (although it sometimes seems that way).

Is this the same forum where people claim rents are cheaper than ever etc?

How can we then have comments like the above with some tosser rudely asking me if I'm insane?

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OK TTRTR lets take this very very slowly in non-business speak because like you I have a home to go to and half a city to travel across before I can hit the sack and its 12.30am here. It’s been a long week and I’m looking forward to the weekend so I really don’t want to have to repeat myself again on Monday.

If current prices are to be called sustainable then there can be no stagnation, the market must rise or prices will simply fall back in real terms as wage inflation etc. erodes them.

If you believe that there will be a stagnation then you are simply arguing the same point as me, which I made in the first post. That is real values have to fall.

Assuming that you believe current values are sustainable, you must therefore accept that house prices have to rise at least at the rate of general inflation.

Prices are currently out of the reach of the 20 something prospective FTB, they are being forced to rent rather than buy.

This is because rents are currently cheaper than the mortgage rates that they could not afford.

Rents are currently cheaper than these rate because of competition.

Rents can currently be kept low either because the BTL bought into the boom before the current peak, or because he bought late and is now subsidising the rent so that it covers his mortgage.

For the late entrant BTL who is currently subsidising his rent to pay the mortgage, rents must rise in the future for him to see his investment making a return.

If his investment doesn’t make a return then he will probably pull out of BTL.

But for rents to rise, the 20 something prospective FTB must be able to afford more rent. For this to happen he must see his wages increase. Either that or he will simply be forced out of the renting game and relocate or stay at home etc.

But the now older 30 something true FTB can also afford more on a first property. This older FTB is competing directly with BTL’ers for his property. So BTL’ers now have to pay more to start up as a landlord.

So property values must increase.

OK TTRTR are we fine so far? Fits in with your argument that BTLs must learn to live with a non-return period, yes? There’s just one fly in the ointment HOUSE PRICES MUST RISE EXPONENTIALLY if you want to maintain a set non-return period for new entrant BTLs. In plain language, the period that an new BTL has to wait before his investment makes a return is (say) 5 years. So for 5years he makes a loss, then he starts making a return. If house prices are rising at the rate of general inflation then the next new entrant a year later would have to wait greater than 5years before his investment makes a return. The period of (say) 5 years would only remain static if property prices rise exponentially.

Why?

1. Stamp Duty provides an increasing barrier to entry.

2. CGT and IHT stops you returning a the full value of your portfolio when exit of the market.

3. Rental returns must always EXCEED mortgage repayments and running costs by a significant amount to make a profit, and they must do this within a relatively short period to prevent the BTL from seeing his investment as poor when compared to other investments.

4. Rental returns must be significantly lower than mortgage repayments to prevent the renter from becoming an FTB for a significant period until he earns enough.

5. Mortgage repayments must be out of reach of the majority of current FTBs whether they are 20, 30 or 70 something, (this is not age dependant – remember your customer never goes away, as you said he just gets older)

So why should it matter if property values have to rise exponentially to support the current values using your scheme?

Most obviously because your customer has to be continually older and older to stop renting and FTB. As he gets older he has less time build up the equity required to BTL. But you ultimately need some FTBs to eventually BTL or you cannot replace those BTLs exiting the market.

So tell me TTRTR, how the hell is that sustainable?

Ps. Oh, just for your information that comment about my “waffle based on your own thoughts†– guess what I do as part of my job, MRA. No that’s not an abusive term TTRTR so lets not be having any tantrums this time, instead maybe you might want to crack the spine on that mint condition ‘running my first investment’ hardback collecting dust on your shelf.

See you after the weekend. :rolleyes:

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Listen TB, having reread my own posts I'll admit to sounding rude etc. But the fact is that I've been here discussing this for months now. I don't feel I constantly need to justify my thoughts to every new poster that comes along.

Your posts are so full of your own assumptions, insinuations and rude comments that I honestly don't think I could discuss things with without going off again. If you need an example, just look at your last paragraph above.

So please, lets start again if you really want to discuss (and please keep it to the point - I've got 3 kids running around behind me here), otherwise you can always go to singing pig where there'll be plenty of others who'll challenge your ideas. Not trying to make an insult of my own here, but do you think you came to the right place to be convinced? This site is after all populated by 98% bear thinking.

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  • 439 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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