What Are Other People Seeing That We Don't?

[shindigger]

In many cases the only way of assessing price is the most recent price.

The most recent price sort of sets the level the sellers want to achieve. Known as 'anchoring'. http://en.wikipedia.org/wiki/Anchoring

It's a sort of boom and bust system as the market over compensates either way.

On the macro front though....

Add in a shortage of a life essential with limitless nuclear weapons in the form of credit to fight each other with make people keep pushing the price up to get what they want.

The main thing you'd think would change it is credit availability or falling incomes/rising unemployment. But if the currency collapses they'll just let people come in and buy up the houses and rent it back to you (like they did recently and continue to do).

I'm not sure what the trigger for a correction will be. A rise in interest rates, any rise would 'help' as that would push up the currency too.

The ONLY thing that will properly stop this, is a meaningful rate rise.

They will ONLY rise when the control of those rates is wrested from the hands of politicians of any hue.

Therefore: See sig.

[council dweller]

My sister has about 2 weeks to live (cancer) and there she was asking me "when are you going to buy your council house"?

Ye Gods...

[Timak]

What would it rent for?

What makes you think people are thinking?

Rent at about £1200-£1500 a month Max.

Size around 80 m2.

[Bill D'arblay]

Rent at about £1200-£1500 a month Max.

Size around 80 m2.

How is this possible? £1500 is just below net average earnings.

I haven't looked but I don't think HB would pay anything like this amount in that area.

[Limon]

Rent at about £1200-£1500 a month Max.

Size around 80 m2.

Are you sure about that? People* were paying £400-500 per month for rooms in shared houses on Mill Road a few years ago, so if it's a three bed place and the living room is turned into a fourth bedroom, that would imply a total rent closer to £2000/month today.

*Well, assuming your definition of "people" encompasses graduate students and similar riffraff

[cybernoid]

Rent at about £1200-£1500 a month Max.

Size around 80 m2.

Assuming 500k purchase price, lower than actual since it was 'over',

Lets say for the buyers sake they get 1500, rule of thumb taking into account voids, agency cut and fees etc = 15k a year income

A cash buyer gets a maximum 3% yield.

Ive done all the other sums elsewhere, but that isn't enough when you take everything else into account. Therefore it is overpriced. Personally I wouldn't do buy to let for less than 2-3 times that yield, I put that at a reasonable value of 170k-250k, lets say 210k. When you consider the 130k paid for it 13 odd years ago that sounds reasonable to me.

Could be owner occupier, but the same rules apply. Much of the market is buy to let, which ties capital values to rent and therefore earned income. When the choice is rent or buy you cannot get away from earned income anchoring prices for owner occupiers either.

Chances are they spent some money from another property sale at an inflated price, who knows. In that case they didn't have to earn it, easy come easy go. It is twice fair price by any reasonable measure, people who pay such prices simply aren't thinking.

[silver surfer]

Imagine you've got £500k and want to invest it for an income. Thousands upon thousands of new people find themselves in that position (or something quite like it) each year.

A corporate bond fund, a FTSE tracker...or a terraced house in Cambridge. All give a similar gross yield of approximately 3.5%. All have their own risks and complications.

Personally I'd stay well away from the terraced house for all the reasons that are regularly rehearsed on this forum. Others will make a different decision.

It's not fair, just, politically sustainable, or free of social consequences. But it is reality.

[Gigantic Purple Slug]

Part of the issue is that you assume this sale was dictated by normal market economics and yield/roi,

In that area its possible that it was bought by a wealthy overseas person looking to accommodate their kids at uni for a few years. if there is a shortage of property for sale in that area then you can pretty much name your price and probably get it.

[Patfig]

I am struggling to think how to articulate this, which makes starting a topic a strange idea, but what are other people seeing that we don't?

What has bought this to prominence in my mind is the recent house sale by a friend of a friend.

The small terraced house in Mill Road, Cambridge they bought for £130k in the early 2000's has just sold for over £500k with a bidding war and several "name your price" offers.

Who can think that is a good deal? What are their expectations for their earnings? How can a tiny terraced house with no garden or parking be worth £500k? What are these people thinking?

I see dead people

[Si1]

Imagine you've got £500k and want to invest it for an income. Thousands upon thousands of new people find themselves in that position (or something quite like it) each year.

A corporate bond fund, a FTSE tracker...or a terraced house in Cambridge. All give a similar gross yield of approximately 3.5%. All have their own risks and complications.

Personally I'd stay well away from the terraced house for all the reasons that are regularly rehearsed on this forum. Others will make a different decision.

It's not fair, just, politically sustainable, or free of social consequences. But it is reality.

You sure you're not confusing profit and dividend wrt shares Edited February 8, 2015 by Si1

[mmt]

Imagine you've got £500k and want to invest it for an income. Thousands upon thousands of new people find themselves in that position (or something quite like it) each year.

A corporate bond fund, a FTSE tracker...or a terraced house in Cambridge. All give a similar gross yield of approximately 3.5%. All have their own risks and complications.

Personally I'd stay well away from the terraced house for all the reasons that are regularly rehearsed on this forum. Others will make a different decision.

It's not fair, just, politically sustainable, or free of social consequences. But it is reality.

So on the one hand you can invest in a properly diversified portfolio of assets - government bonds, global equities etc. Lots of information on how to do that available. Or you concentrate your wealth in a single illiquid asset. The risks are very different but they are not adequately compensated for in the case of property currently.

[ProleStore]

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

"We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first."

[renting til I die]

They are of the view that "property only ever goes up" and that "the government will make sure house prices don't fall".

Frustratingly the last 8 years has supported these views.

Property is the British national obsession.

I would say the past 30 years, at least, support this view.

Even when you consider the crash of the early 90s (which was a real crash in values, not a nominal one like the early 80s). I know someone whose father lost a small buy to let empire in that crash and when I speak to him, all he says about it is how much it would be worth if his father held onto it! In most people's eyes crash would be an opportunity to pick up a bargain!

Back to the OP.

Some good comments on here, I would list the reasons as follow;

Low interest rates.

Easy leading with high multiples.

High rents in comparison to average mortgage costs.

Increasing prices which means by not buying today you are worst off tomorrow.

Political motivations (not just all the props but the rule of law and the perceived safeness of the UK).

Ultimately demand and that is not only from FTBs but from investors of every ilk. (who sell their first house when they move now? You just buy another and rent out the first!)

Also as pointed out by someone, people don't believe in the value of money (I believe this has been increased due to quantitative easing) but do believe in the value of hard assets! Of course this a slightly counter-productive argument as hard assets can only appear valuable when valued in said currency! Otherwise a house is valued at 1 house (depending on location), it will always hold some value (unless it falls off a cliff) to someone but this value is ultimately arbitrary.

Most of us on here think that the currently situation of low interest rates and high debt to earnings is unsustainable, so we have a bias against buying. BUT if you looked at the current situation and you saw no reason for it to change, then assuming you could get the loan or had the cash, you would buy a house before you could say location, location, location!

I think the psychology of the average citizen causes them to not see things that we do, rather than to see things that we don't. Here on HPC we spend a huge amount of time looking down one (the sensible) end of the kaleidoscope, in terms of govt props, construction, easy credit etc. The average buyer looks down the other end altogether.

The average person in the UK is so accustomed to being told what to do and when to do it, and what's good for them and what isn't, that they just don't think any further than what the bank is prepared to lend them. If the banks says "We'll lend you 6x earnings so you can buy this crap little 2 bed terrace", they assume that to mean that it's safe to do so. Those that use a broker will lie if the broker tells them that "everybody does it", because in their own minds, that means that it's not just OK to do so, but that it's somehow safe for them to do so.

You only need to spend a little time on MSE to see this mentality. People will get into huge amounts of debt, and only at the point where they realise they can't repay it does it even enter their heads that they might have overdone it. At which point it's the fault of the bank, the credit card company, the broker, etc.

Putting it simply, the average person has been trained not to think for themselves. So they don't. End of story.

Sums up the psyche of the current population pretty well!

[renting til I die]

My sister has about 2 weeks to live (cancer) and there she was asking me "when are you going to buy your council house"?

Ye Gods...

I'm sorry the hear that. Cancer is no laughing matter but I admit I did laugh when I read this comment!

[Exiled Canadian]

So on the one hand you can invest in a properly diversified portfolio of assets - government bonds, global equities etc. Lots of information on how to do that available. Or you concentrate your wealth in a single illiquid asset. The risks are very different but they are not adequately compensated for in the case of property currently.

I wonder whether the liquidity of other types of investments (ETF/Bonds) is actually what puts people off them. I can value my portfolio every day in about 5 minutes, some days I win, others I lose. What I can't do is hide from the fact that my portfolio has "lost money" by kidding myself that "my ETF is different" or that "shares always go up". The market tells me, on a real time basis, what I could liquidate my position for.

The other thing that I wonder about is the availability of leverage. Leveraging an investment portfolio is possible, but not a concept people are used to; whereas everyone knows how to take a leveraged position in the housing market.

[council dweller]

Well yes, the wife and I have laughed more as she`s got closer to the end. Finally it`s mixed with jaw dropping disbelief! They just cant let go....

[Timak]

Are you sure about that? People* were paying £400-500 per month for rooms in shared houses on Mill Road a few years ago, so if it's a three bed place and the living room is turned into a fourth bedroom, that would imply a total rent closer to £2000/month today.

*Well, assuming your definition of "people" encompasses graduate students and similar riffraff

To be fair I was looking at renting whole houses, on a room by room you might get more.

It is a 2 bedroom place with a third bedroom conversion but open plan downstairs so no chance of a fourth bedroom.

Went on the market for £475k sold for about £510k within a week.

[Venger]

Who can think that is a good deal? What are their expectations for their earnings? How can a tiny terraced house with no garden or parking be worth £500k? What are these people thinking?

They're in the bubble. Hard embracing the bubble. Loving the bubble.

And there are HPCers who devote their lives to such buyers, for the last 10 years, as being victims, now, and each time it unwinds.... leading to reflations for even greater weight for non-owning renters to carry.

[Venger]

Good question. Its amazing the amount of people I know that just jump on the ladder without thinking about the capital price of a house.

The main considerations seem to be. Monthly repayments and Deposit needed.

To be fair, these are the only real barriers to "owning" and home. I mean if prices shot up 1000% overnight and the banks were still willing to lend you the money at 0.0001% mortgage rate then why not. Maybe in a years time prices will be 2000% up??

There is now talk of the first negative rate interest rate, all bets are off as to what happens next.

But where does it end, surely we must be close to saturation point on prices with these low rates. Wages ain't going up for the masses.

I see this thread is full of it too... excuses. '20 years of brainwashing to artificially create obsession.... houses etc'

Well I would like to buy a house, but am not going to pay mad ponzi stupid high. It's not brain-surgery or rocket-science.... £500K terraces.... 'They didn't know what they were doing' - rubbish.

And if other market participants eager to pay crazy stupid prices, embrace prospect of negative mortgage rates... then that's their own decision. HPCers need to stop the love the give to the bubble lovers paying ever higher prices with more debt... and of course, it all pushes up value for older outright and equity rich owners owners/ loved by BTLers (so many blissfully complacent... not had anything to worry about for decades some of them... still telling everyone it only goes up cause too few houses/small island).

HPC is the cure. Stop trying to prevent the cure.

[ProleStore]

I would say the past 30 years, at least, support this view.

Even when you consider the crash of the early 90s (which was a real crash in values, not a nominal one like the early 80s). I know someone whose father lost a small buy to let empire in that crash and when I speak to him, all he says about it is how much it would be worth if his father held onto it! In most people's eyes crash would be an opportunity to pick up a bargain!

Back to the OP.

Some good comments on here, I would list the reasons as follow;

Low interest rates.

Easy leading with high multiples.

High rents in comparison to average mortgage costs.

Increasing prices which means by not buying today you are worst off tomorrow.

Political motivations (not just all the props but the rule of law and the perceived safeness of the UK).

Ultimately demand and that is not only from FTBs but from investors of every ilk. (who sell their first house when they move now? You just buy another and rent out the first!)

Also as pointed out by someone, people don't believe in the value of money (I believe this has been increased due to quantitative easing) but do believe in the value of hard assets! Of course this a slightly counter-productive argument as hard assets can only appear valuable when valued in said currency! Otherwise a house is valued at 1 house (depending on location), it will always hold some value (unless it falls off a cliff) to someone but this value is ultimately arbitrary.

Most of us on here think that the currently situation of low interest rates and high debt to earnings is unsustainable, so we have a bias against buying. BUT if you looked at the current situation and you saw no reason for it to change, then assuming you could get the loan or had the cash, you would buy a house before you could say location, location, location!

Sums up the psyche of the current population pretty well!

I don't believe that it is rational, I think the recent bailouts and props are just the latest phase of the delusion, they aren't the cause.

All irrational bubbles are profitable, for a while, once the inertia gets going. Doesn't make them rational.

The housing market is our society's equivalent of the Easter islander's stone faces.

Easter islanders spent so many of their resources building faces, that their society collapsed.

[silver surfer]

You sure you're not confusing profit and dividend wrt shares

Nope. A low cost FTSE tracker yields round about 3.5%. If you want more you can find low cost "smart" trackers, that weight towards high yielding companies with consistent records of growing or at least holding dividends, you will find many that yield over 4%.

Try "Vanguard" for ETF's with annual fees below 0.1%, that are closely monitored, liquid, and hold the actual securities rather than proxies or derivatives.

But if you're the typical British retirement investor you'll disregard all such options out of hand, and confine your choice to cash, annuities, or residential property.

Hey ho, we all make our own decisions.

[renting til I die]

I don't believe that it is rational, I think the recent bailouts and props are just the latest phase of the delusion, they aren't the cause.

All irrational bubbles are profitable, for a while, once the inertia gets going. Doesn't make them rational.

The housing market is our society's equivalent of the Easter islander's stone faces.

Easter islanders spent so many of their resources building faces, that their society collapsed.

This may well be how it will end...... so, what's your game plan?

[Si1]

Nope. A low cost FTSE tracker yields round about 3.5%. If you want more you can find low cost "smart" trackers, that weight towards high yielding companies with consistent records of growing or at least holding dividends, you will find many that yield over 4%.

Try "Vanguard" for ETF's with annual fees below 0.1%, that are closely monitored, liquid, and hold the actual securities rather than proxies or derivatives.

But if you're the typical British retirement investor you'll disregard all such options out of hand, and confine your choice to cash, annuities, or residential property.

Hey ho, we all make our own decisions.

Nope I'm afraid you have your basic definitions mixed up, suggest you read up

[dances with sheeple]

Imagine you've got £500k and want to invest it for an income. Thousands upon thousands of new people find themselves in that position (or something quite like it) each year.

A corporate bond fund, a FTSE tracker...or a terraced house in Cambridge. All give a similar gross yield of approximately 3.5%. All have their own risks and complications.

Personally I'd stay well away from the terraced house for all the reasons that are regularly rehearsed on this forum. Others will make a different decision.

It's not fair, just, politically sustainable, or free of social consequences. But it is reality.

Really? Would have thought the number of people with that amount saved up to actually invest was quite small. The majority "invest" in property because the only big money they are ever going to see is in the form of a mortgage loan.

Edited February 8, 2015 by dances with sheeple

[dances with sheeple]

My opinion is that when it all pops it will happen really quickly (like the oil price) and people will just be left completely out of their depth in being able to cope, respond or understand in any meaningful way. There are a LOT of straws in the wind today that were not there when this site started saying it was unsustainable? To take one example, Scotland is probably going to go all in for the SNP, and if there is even a hint of bearded people doing bad things in the UK before May, UKIP will take historic numbers of seats. That alone will rattle financial/bond markets IMO.