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Ephraim Bubble Blower

The Uk Housing Market - My Thoughts In Full

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After having yet another evening out ruined by the topic of conversation turning to the housing market, and me being left increasingly alone and desperate trying to defend what to most homeowners is the indefensible, I decided to put my full theory on the current state of the UK housing market onto the internet. In this way, I can simply refer them to the site and get on with enjoying my evening.

http://investedinterests2005.blogspot.com

I should warn you it is rather lengthy (but then the bubble has gone on a long time also), but I would appreciate any critical assessment. Obviously thanks should go to many on this site for their inspiration and I apologise in advance if I've borrowed anyone's ideas without asking.

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After having yet another evening out ruined by the topic of conversation turning to the housing market, and me being left increasingly alone and desperate trying to defend what to most homeowners is the indefensible, I decided to put my full theory on the current state of the UK housing market onto the internet. In this way, I can simply refer them to the site and get on with enjoying my evening.

http://investedinterests2005.blogspot.com

I should warn you it is rather lengthy (but then the bubble has gone on a long time also), but I would appreciate any critical assessment. Obviously thanks should go to many on this site for their inspiration and I apologise in advance if I've borrowed anyone's ideas without asking.

Fantastic article. I read it all the way through to the end! Some of your arguments might be a little bit subtle for the average reader, but spot on with all the opinions.

You state that the ODPM index is not mix-adjusted, but I had the impression that it is. You might want to check this.

I wonder if it would be worth mentioning the introduction of the term "mortgage equity withdrawal". I have the impression that in years past, increasing your secured debt was called "taking out a second mortgage", which had all the connotations of visiting a pawnbroker. The new term, which is a marketing coup, seems to say "hey, you're rich, you just need a mechanism to access your wealth ..."

frugalista

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After having yet another evening out ruined by the topic of conversation turning to the housing market, and me being left increasingly alone and desperate trying to defend what to most homeowners is the indefensible, I decided to put my full theory on the current state of the UK housing market onto the internet. In this way, I can simply refer them to the site and get on with enjoying my evening.

http://investedinterests2005.blogspot.com

I should warn you it is rather lengthy (but then the bubble has gone on a long time also), but I would appreciate any critical assessment. Obviously thanks should go to many on this site for their inspiration and I apologise in advance if I've borrowed anyone's ideas without asking.

Criticism #1

White text on black background, not good on the eyes.

Further criticisms reserved until after I have copy pasted it into Wordpad to read it.

:ph34r:

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Fantastic piece. A crystallisation of all the rational arguments against buying now.

I'm a little puzzled though. How come you felt desperation in arguing your point with your 'friends' tonight. Surely you destroyed their ill-thought out rhetoric with your well thought out arguments, or did they just close down?

Also agree, white text on black is tough to read, I managed it, but I have a headache now.

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Thanks - have adjusted the formating so should be easier on the eye now.

With regard to friends not listening to my point of view, I think they simply extrapolate the last five years of experience and believe it is the 'norm'. In a way it's understandable - i've always been a bit of a contrarian though.

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Thanks - have adjusted the formating so should be easier on the eye now.

With regard to friends not listening to my point of view, I think they simply extrapolate the last five years of experience and believe it is the 'norm'. In a way it's understandable - i've always been a bit of a contrarian though.

Not much to quibble with here. But forgive me if I do wonder if your intelligence and effort isn't a bit wasted on this.

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i think the title needs to have animated gif flames on it. flickering.

and some background midi music wouldnt go a miss. maybe rhapsody in blue.

id certainly recommend a hit counter. there are lts to choose from from digital to clockface.

id also thicken up the borders and develop some keywords to insert as meta tags.

just my two pennies worth.

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i think the title needs to have animated gif flames on it. flickering.

and some background midi music wouldnt go a miss. maybe rhapsody in blue.

id certainly recommend a hit counter. there are lts to choose from from digital to clockface.

id also thicken up the borders and develop some keywords to insert as meta tags.

just my two pennies worth.

I'm with Fred on this one.

I would also recommend a large button saying "sign my guestbook...by bravenet". Have you thought about working in frames? Lots of them...maybe a frame for the title, a frame for the navigation on the left, and a frame for the content. How about a nice webring link at the bottom and try applying for a "Golden Web Award" so you can display a nice gif of a trophy or two at the top of the page.

Your pictures are nice but some high definition unoptimized ones would be cool...around 600dpi.

Finally, try downloading some free flash buttons and scrapping the navigation altogether.

Ok...I'll get back to reading your article now!

;)

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Alpha. A brilliant essay - you might want to send it to The Economist/Spectator/New Statement or similar.

It is at this point that I will make a fairly controversial statement. In short, rather than concerning itself with ensuring the housing bubble doesn't pop, in my view the Bank of England wants to ensure it does pop and will maintain interest rates at levels which guarantee this outcome. Let me explain. If house prices were to continue rising at recent rates of 10% pa or more, the outcome would almost certainly be inflationary (thanks to the extra consumption brought on by refinancing, equity withdrawal etc..). Similarly, if house prices were to continue rising at recent rates but then crash, then the outcome would almost certainly be deflationary as the Japanese experience showed. In short, the housing bubble has to be stopped before it can do further damage (the only question is whether a 'soft landing' results or a crash).

Whilst the Bank of England (and also the Fed in the US) may dress up its hawkishness over interest rates in the language of 'oil-related inflation fears', in truth it is focused solely on popping the housing bubble.

Do you have any evidence for this? It's an interesting point, but without evidence it's a bit unconvincing.

Reference again to the Japanese experience is useful at this juncture - because the inflation rate turned negative, the Bank of Japan was unable to get real interest rates negative (in the hope of stimulating the economy), even with nominal interest rates at zero.

Couldn't they have increased the money supply?

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Alpha. A brilliant essay - you might want to send it to The Economist/Spectator/New Statement or similar.

Do you have any evidence for this? It's an interesting point, but without evidence it's a bit unconvincing.

The RBA (Oz) has pretty much admitted that they want a housing slowdown and I think the Fed said something similar so it wouldn't be unreasonable to conclude that the BoE would be thinking similarly.

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Excellent article.

Regarding format, some of the responses on this thread are pretty funny. Before adding a 'burning animated gif' it may be worth assessing your audience. From my experience most people who will finish reading your article are not really into metallica ;)

FH

Edited by flash harry

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A well laid out, informative and easy to follow article which avoids being sancitmonious or patronising. Good stuff!

On a purely aesthetic level, try 'justifying' the whole passage so it sits better on the page...

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Ephraim BB

I really enjoyed reading this. Thanks for posting such a well written article with very interesting and valid points, especially regarding real interest rates and the erosion of the debt, the rent vs buying calculation and valuation of property as a multiple of rent.

I have two questions really - one about tax and the other about quantifying "property risk"...

In section 2 "Renting is dead money" - As a higher rate tax payer I am earning only 2.85% interest net on my STR fund. Yes I could invest it into something more rewarding but cannot stomach the risk. Using the STR fund as a deposit would protect it from tax. So, when I do the maths, trying to work out whether it would be better to buy or rent a particular property, if I had a really small deposit, then yes it would be better to rent. But with the deposit that I do have, it would actually be cheaper to buy, even after factoring in some pretty hefty service charges.

Taking this argument a bit further, it makes sense for a young FTB with little or no deposit to rent. But the further up the ladder you go, it makes increasing sense to buy. So could the bottom of the market be sustained by BTLs happy to provide starter homes to rent? The FTB buys when older than was traditionally the case, with a deposit of a size that tips the rent/buy equation towards buying - as buying is now cheaper than renting? This isn't really what I wish to believe, as an STR who is finding it impossible to trade up to something that we'd be happy to live in for the next 5-10 years, but it does seem to be the case currently.

Similarly in section 6 on "Affordability..." - My cost of capital would be the mortgage rate, if I had no deposit or a very small one. But for a 100% cash buyer who is a higher rate tax payer, would the cost of capital be the 2.85%? If it is, and we don't adjust for the risk of holding property, then the cash buyer would be looking to buy a property at 35x rent? This is an extreme case obviously so not useful as a market valuation. But, equally, you should assume that a large proportion of market participants have some capital behind them.

Maybe the cost of capital should be adjusted as you suggest to allow for the risk of holding property. But how do you reach a figure for the adjustment? Like the equity risk premium, this is a really difficult figure to pin down. I wonder what the long term implied "property risk premium" actually is? I guess it could be worked out if you had long-run data on house prices, rents and mortgage rates. Still, after all that trouble, it would be a meaningless average. The implied risk premium of holding property will be low when house prices are high, but higher if house prices fall - it's all a question of where you are in the cycle. If we're at the top of the house price cycle, perhaps we'd better say the implied risk premium is rather high, because very shortly we might find ourselves at the bottom of the cycle! Assuming we're looking for a high risk premium in that case, what is the figure we should use in your view?

The flat that we are currently renting would cost 22x the annual rent to buy. That is an implied 4.5% cost of capital - so close to the mortgage rate that it implies zero property risk for an FTB with little/no deposit - which is a very scary assumption.

Let's say the property risk premium is 2%. Then the cash buyer would buy at 21x rent. Somebody with only a small deposit and paying a mortgage at 4.75% would buy at only 15x. Does this explain why the traditional marginal buyer has disappeared (the FTB) but that the market is moving very slowly on much lower volumes, because all the trader-uppers can justify paying higher prices given the size of their deposits?

Having said all of this, the factors that alter all of these sums are mortgage rates (which could go up) and property prices (which could go down). If both of these things happened, the "property risk premium" would go up pretty sharpish and it wouldn't take much of a shift to tip the balance between buying and renting, even for someone with a sizeable deposit.

So what we really need to know is .... what's going to happen to interest rates and property prices ........ ????

Edited by geranium

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After having yet another evening out ruined by the topic of conversation turning to the housing market, and me being left increasingly alone and desperate trying to defend what to most homeowners is the indefensible, I decided to put my full theory on the current state of the UK housing market onto the internet. In this way, I can simply refer them to the site and get on with enjoying my evening.

http://investedinterests2005.blogspot.com

I should warn you it is rather lengthy (but then the bubble has gone on a long time also), but I would appreciate any critical assessment. Obviously thanks should go to many on this site for their inspiration and I apologise in advance if I've borrowed anyone's ideas without asking.

Very very good EBB - now send it to all the mainstream press..... !!! - See what happens....

One thing you left out EBB - MORTGAGE FRAUD - MUCH MUCH bigger than anyone is letting on: http://www.housepricecrash.co.uk/forum/ind...showtopic=19113 - look particulalry at links - and especially the BBC Money Programme fidings over a year ago - which was the TIP of the iceberg.... THIS IS VERY IMPORTANT EBB. EP

Edited by eric pebble

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Good work - well done.

Now, putting my Editor's hat on - it is too long-winded and takes too long to get to the point in the introduction. (Most independent people will yawn before they finish the introduction IMPO.). This is a classic mistake that people make when writing - you know those Hollywood films where they start the film way too early in the story.l Get to the point from word go!

You need to, IMPO, go back and edit the waffle down, make it more succint. If you leave it several days without looking at it I bet you will re-read it again and realise that there is an awful lot of stuff in there that can be shortened or removed entirely.

Just my two cents.

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As a higher rate tax payer I am earning only 2.85% interest net on my STR fund.

Why do you declare your interest to the taxman? As a HRT you already have a hefty tax bill (including 22% on your savings income). Do you not begrudge paying the further 18% tax on this?

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Why do you declare your interest to the taxman? As a HRT you already have a hefty tax bill (including 22% on your savings income). Do you not begrudge paying the further 18% tax on this?

It's down to a mixture of honesty and possibly a mis-guided notion that redistribution of income by government is not a bad thing (think of it as a form of charity) plus not wishing to get caught. Maybe there's only a very small chance of getting caught, I don't know. All I know is that it does not pay (at all) to have convictions for tax fraud if you work in a regulated industry.

Maybe in unregulated professions (BTL landlords?) it matters less...

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It's down to a mixture of honesty and possibly a mis-guided notion that redistribution of income by government is not a bad thing (think of it as a form of charity) plus not wishing to get caught. Maybe there's only a very small chance of getting caught, I don't know. All I know is that it does not pay (at all) to have convictions for tax fraud if you work in a regulated industry.

Maybe in unregulated professions (BTL landlords?) it matters less...

I suspect there are a few who work in regulated professions who have less scruples about these things, but I take your point.

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Thanks for all the kind comments. Unfortunately with regard to formatting, my technological skills are not fantastic unfortunately but if someone is kind enough to take hold of it and make it prettier, and maybe post it on the front of this site I'd be very grateful.

I could put the conclusion first and then very briefly describe my challenges to all the 'myths' but just saying "...renting is cheaper than buying in a flat market" is a bit flippant and the type of thing that gets shouted down at dinner parties. Hence I wanted to put statistics around it and put all the 'myths' in their full context.

I may however (thanks to suggestions) write a more condensed readable version and perhaps submit it for publication. I suspect the average Sunday Times reader doesn't want to read about the importance of real interest rates over their cornflakes.

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Ephraim BB

I really enjoyed reading this. Thanks for posting such a well written article with very interesting and valid points, especially regarding real interest rates and the erosion of the debt, the rent vs buying calculation and valuation of property as a multiple of rent.

I have two questions really - one about tax and the other about quantifying "property risk"...

In section 2 "Renting is dead money" - As a higher rate tax payer I am earning only 2.85% interest net on my STR fund. Yes I could invest it into something more rewarding but cannot stomach the risk. Using the STR fund as a deposit would protect it from tax. So, when I do the maths, trying to work out whether it would be better to buy or rent a particular property, if I had a really small deposit, then yes it would be better to rent. But with the deposit that I do have, it would actually be cheaper to buy, even after factoring in some pretty hefty service charges.

Taking this argument a bit further, it makes sense for a young FTB with little or no deposit to rent. But the further up the ladder you go, it makes increasing sense to buy. So could the bottom of the market be sustained by BTLs happy to provide starter homes to rent? The FTB buys when older than was traditionally the case, with a deposit of a size that tips the rent/buy equation towards buying - as buying is now cheaper than renting? This isn't really what I wish to believe, as an STR who is finding it impossible to trade up to something that we'd be happy to live in for the next 5-10 years, but it does seem to be the case currently.

Similarly in section 6 on "Affordability..." - My cost of capital would be the mortgage rate, if I had no deposit or a very small one. But for a 100% cash buyer who is a higher rate tax payer, would the cost of capital be the 2.85%? If it is, and we don't adjust for the risk of holding property, then the cash buyer would be looking to buy a property at 35x rent? This is an extreme case obviously so not useful as a market valuation. But, equally, you should assume that a large proportion of market participants have some capital behind them.

Maybe the cost of capital should be adjusted as you suggest to allow for the risk of holding property. But how do you reach a figure for the adjustment? Like the equity risk premium, this is a really difficult figure to pin down. I wonder what the long term implied "property risk premium" actually is? I guess it could be worked out if you had long-run data on house prices, rents and mortgage rates. Still, after all that trouble, it would be a meaningless average. The implied risk premium of holding property will be low when house prices are high, but higher if house prices fall - it's all a question of where you are in the cycle. If we're at the top of the house price cycle, perhaps we'd better say the implied risk premium is rather high, because very shortly we might find ourselves at the bottom of the cycle! Assuming we're looking for a high risk premium in that case, what is the figure we should use in your view?

The flat that we are currently renting would cost 22x the annual rent to buy. That is an implied 4.5% cost of capital - so close to the mortgage rate that it implies zero property risk for an FTB with little/no deposit - which is a very scary assumption.

Let's say the property risk premium is 2%. Then the cash buyer would buy at 21x rent. Somebody with only a small deposit and paying a mortgage at 4.75% would buy at only 15x. Does this explain why the traditional marginal buyer has disappeared (the FTB) but that the market is moving very slowly on much lower volumes, because all the trader-uppers can justify paying higher prices given the size of their deposits?

Having said all of this, the factors that alter all of these sums are mortgage rates (which could go up) and property prices (which could go down). If both of these things happened, the "property risk premium" would go up pretty sharpish and it wouldn't take much of a shift to tip the balance between buying and renting, even for someone with a sizeable deposit.

So what we really need to know is .... what's going to happen to interest rates and property prices ........ ????

Thanks for your comments. With regard to renting vs buying, I think your conclusion is correct, although you also need to take into account the additional upfront costs of buying (I should have mentioned this) which would also be invested in your savings account instead of spent eg. agency costs, survey costs, solicitor costs etc.. I also wanted my article to be seen as being a summation of several arguments against buying, for which the 'renting is cheaper' argument is only one. In other words, the cashflow argument may point towards buying, but all my arguments about people misunderstanding the real interest rate (and thus tend to take on too much debt) may point towards renting. It may make sense to compare it to the position of a company - take the situation of General Motors for example - they have huge cash balances and until very recently at least, were cashflow positive. However they have an enormous debt hanging over them in the form of pension/healthcare liabilities. In other words they can pay their bills month-to-month, but they are still essentially bankrupt (probably) - the only question is when judgment day arrives.

With regard to your comment about what a cash buyer would pay for a property, I don't think the assumptions are necessarily any different (and hence your comments about being willing to pay 35x are probably about right) but bear in mind the renter (in my 'rent vs buy' calculation) is paying money to a landlord who clearly isn't living in the property and in most cases, has a sizeable (and interest-only often) mortgage. Also the type of people that are fortunate enough to be 100% cash buyers should be able to invest their money in a diversified fashion to get a return far greater than the one you suggested.

The issue of the 'property risk premium' is indeed complex and I'm not sure I have easy answers. However where I do disagree with you is when you suggest the risk premium is low when prices are high, and high when prices are low. Infact I think it's the other way around since there the downside is probably higher than the upside. To put it another way, would you pay more for a company in terms of Price/Earnings ratios after it has had a great run or before? Would you pay 50x earnings for Google in ten years time after it has grown into its valuation?

The whole calculation which a buy-to-let landlord is complicated a little by the leverage they employ, but if one thinks solely in terms of a cash buyer (who already owns a first property), then they should in my view absolutely think in terms of multiples of income with an adjustment made for a. the risk of capital loss, but also b. the possibility of rental growth. My point was that in the current market, the risk of capital loss is high (ie. the property risk premium is higher) and the possibility of rental growth is slim (yields have remained fairly stable and wage growth is in line with inflation).

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Thanks for your comments. With regard to renting vs buying, I think your conclusion is correct, although you also need to take into account the additional upfront costs of buying (I should have mentioned this) which would also be invested in your savings account instead of spent eg. agency costs, survey costs, solicitor costs etc.. I also wanted my article to be seen as being a summation of several arguments against buying, for which the 'renting is cheaper' argument is only one. In other words, the cashflow argument may point towards buying, but all my arguments about people misunderstanding the real interest rate (and thus tend to take on too much debt) may point towards renting. It may make sense to compare it to the position of a company - take the situation of General Motors for example - they have huge cash balances and until very recently at least, were cashflow positive. However they have an enormous debt hanging over them in the form of pension/healthcare liabilities. In other words they can pay their bills month-to-month, but they are still essentially bankrupt (probably) - the only question is when judgment day arrives.

With regard to your comment about what a cash buyer would pay for a property, I don't think the assumptions are necessarily any different (and hence your comments about being willing to pay 35x are probably about right) but bear in mind the renter (in my 'rent vs buy' calculation) is paying money to a landlord who clearly isn't living in the property and in most cases, has a sizeable (and interest-only often) mortgage. Also the type of people that are fortunate enough to be 100% cash buyers should be able to invest their money in a diversified fashion to get a return far greater than the one you suggested.

The issue of the 'property risk premium' is indeed complex and I'm not sure I have easy answers. However where I do disagree with you is when you suggest the risk premium is low when prices are high, and high when prices are low. Infact I think it's the other way around since there the downside is probably higher than the upside. To put it another way, would you pay more for a company in terms of Price/Earnings ratios after it has had a great run or before? Would you pay 50x earnings for Google in ten years time after it has grown into its valuation?

The whole calculation which a buy-to-let landlord is complicated a little by the leverage they employ, but if one thinks solely in terms of a cash buyer (who already owns a first property), then they should in my view absolutely think in terms of multiples of income with an adjustment made for a. the risk of capital loss, but also b. the possibility of rental growth. My point was that in the current market, the risk of capital loss is high (ie. the property risk premium is higher) and the possibility of rental growth is slim (yields have remained fairly stable and wage growth is in line with inflation).

Nice article. A few mistakes tho:

In the paragraph, you use a $ sign, shouldn't this be a £ sign?

According to the ODPM, the total number of property transactions peaked in the first quarter of 2004 at 469,000 and fell by 23.4% to 359,000 during the quarter-ended 30 Jun 05. Not surprisingly, according to the Bank of England, the total value of mortgages approved by banks also peaked in the first quarter of 2004 ($11.2bn in Mar 04) and has averaged $8.4bn per month in 2005.

Also, you mention rightmove. You didn't mention how this is the INITIAL asking price, it is not updated if the seller reduces the price.

Anyway, well done!

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  • 301 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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