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[Article] " Comment: £Trillions Could Be Lost In Housing Bubble Collapse"

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From: www.westernmorningnews.co.uk/Comment-trillions-lost-housing-bubble-collapse/story-28577536-detail/story.html

It is interesting how the Brits’ fascination with property has evolved over time. At present prices, UK residential property is now ‘worth’ about £5trillion (£5,000 billion) and about 65% is owner occupied. Commercial property, all those shops, factories, offices, plant is ‘only’ £400billion. The London Stock Exchange, which includes multinational giants with most of their assets and income overseas, is only worth £2.25trillion. British Government Bonds are £1.5trillion. There is approximately £700billion of cash on deposits held by individuals.

It is interesting how something in which we live – and costing us considerable upkeep – has become so significant in terms of our societal structure. I am very alarmed at the excessive price levels of the average ‘home’ but our governments must be concerned that so much of our economics are impacted by what is happening in housing – and the confidence of those who own it. We should all never forget that over-reliance upon one economic asset, a simple box in which to live, however pretty or comfortable, does not make it immune from irrational excess and frankly, the figures are all out of kilter regardless of the lack of enough new homes being built and the insatiable demand for them – apparently (but never forget that all the people here at the moment do have somewhere to live).

The principles of home ownership and attributing a good value to the place where we live are great aspirations (and without being discriminatory as there is absolutely nothing wrong with other models for living) and encourage a better and more settled society and attitudes generally though of course the higher the prices, the fewer who are able to achieve that and opposites of attitude can develop among the excluded.

However, in reality, the order of asset values should perhaps be: stock market (the base of all our commerce), residential property, commercial property, government bonds. You can see the model requires some considerable re-balancing but perhaps a doubling of the stockmarket is more unlikely than a halving of the value of homes (though the latter would still constitute significant ‘value’ though I shouldn’t wish even to countenance what that would mean for the economy and bad debts). Sadly though, this may be the necessary adjustment required to return to ‘normality’ so watch-out as each could indeed arise. However, those in government also look very carefully at the figures to see what an odd tweak here or there could do insofar as its revenues are concerned – like the extra Stamp Duty on second homes completing after March 31 2016. Maybe Capital Gains Tax on homes cannot be ruled-out either (a loss of £117billion every year we are told) – a cat among the pigeons that would be.

The other week, I bumped into three unrelated individuals whose income arises by renting-out London residential properties. Congratulations to them - they have all done very well indeed but the fear I have is that there appears no concept of any risk. Even borrowing 70% of the cost doesn’t seem to them to represent a very high risk strategy as they calculate the mortgage interest (artificially low at the moment), check the rental and consider the monthly profit and cling on to the latest estate agency prediction that the average London property price will increase by 20% in the next five years. Their lives enjoy an opulence unattainable by many who simply work for a living and well, you just increase your income by re-mortgaging, unlocking the profit you have just made from the latest increase in value of your properties and buy another and hey presto.

It has been an excellent strategy but is it picking up shillings from in front of the steam roller [lol]? It is as if there are no risks attached to the idea whatsoever and certainly property websites don’t seem to say that values can fall, interest rates increase, rentals fall and demand for properties decline and hence void periods for your property arise – let alone the inevitable trouble with some tenants as well as maintenance costs– usually all reflected in the returns of course.

Buying property is a great investment strategy when it is cheap or fairly valued and by all means, the sophisticated, higher risk investor can borrow to gear his returns. But when it is fully valued or simply downright dear or even bubble-like, it is time to push past the crowds and go the other way.

Anyway, it is not a case of trying to call the top but more a case of seeing infinitely superior value in other financial assets – and I should and did say the exact opposite at the Stock market peaks in 1999 especially, driven by the euphoria for yesterday’s property bubble – technology. Oh of course it’s different, yes, they always say that – gold… tulips, cosmopolitan Tokyo’s residential property bubble when prices collapsed 75% in four years, even teddy bears….. Can never go wrong with bricks and mortar, my boy!

Anyway, if it falls, well, I’ll just buy more bargains and wait for the recovery as they always go back up again, you know and I’m in for the long term. (But does that take into account the 40% excessive asset-price inflation relationship since 1990? A 40% drop would be enough to worry most people and things never happen in straight lines as panic sets-in and even I might have turned a buyer if the trough is so low… However, can you carry such a loss and for what length of time? How long can you afford to pay the mortgage interest if there is no rent or the rent is less than the interest?).

So what’s the latest information to fuel my fears for those over-exposed to the sector (and it will ripple across the Country incidentally but clearly the lower the sums, the smaller the losses)?

That an £843,000 Lincolnshire block of flats sold out to crowdfunding investors in 643 seconds, to the ONS' revelation that 44% of people think property would make the most money for their retirement and buy-to-let lending for home purchases up 38%? Yes, indeed, what we think we know – and like – is property, so do I. However, that leads to excessive emotional dependence upon a judgement where we don’t ever want to be wrong and of course, we live in one too and feel snug about the thought of making money whilst we sleep as these things always go up, don’t they. (Would we feel the same if over the last ten years houses had dropped by an average of 5% every year? No, even if ultimately they may be bargains but the masses don’t want anything to do with them then!)

‘Dead certs’ can go horribly wrong: mining and oil companies were the bees’ knees. and unbelievable volatility in top-ranking multi-national companies broaching levels no-one would have ever predicted and yes, the same Irrational negativity can impact house prices.

It can come from an unexpected quarter – the horrendous French terrorist attacks could encourage people to think their families’ personal security is best away from capital cities; what would that do for prices?

I don’t want to shatter anyone’s dreams but sSurely it is wise to keep an open mind and reappraise things if you are over-extended? House prices are historically very high against average wages, interest rates can almost only go one way and tax and regulation are likely to bear-down upon property investors even more.

Remember the adage of Spreading your eggs around – have a balanced portfolio including other types of investments. Borrowing to invest in anything is high risk – and very high risk if you’re playing the last man out game. I even worry that our government and the economic recovery are inexorably connected and that when it blows, the whole pack of cards could start to come down again. You would say goodbye to your money saved at the bank and building society which has been lent against these expensive properties.

Many There are far too many people who are complacent – or is it too comfortable, thinking that the wholly rational calculations against the interest costs they made when buying the next London investment property to rent and the appreciation estimates make them settle-down in their comfortable arm chair with a malt whisky in hand, picking up the latest ‘Successful Property Investing Today’ and complimenting himself on such a shrewd strategy, as he books his next overseas’ holiday for the family after having just arranged the private school place for eight year-old Sophie on the back of their residential portfolio.

Mind you, he is aged somewhere between buy-to-let investors are aged 30-55 and have never suffered a real downturn in the housing market – last time around they weren’t old enough to be an owner. It is sobering and sends a shiver down my back, especially as the sums involved could be trillions – not billions.

Philip J Milton is a chartered financial planner and a Fellow of the Personal Finance Society and the Chartered Institute Of Bankers

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One way or another its taken trillions to prop the market up year after year so it's no surprise that trillions will be lost.

Either way trillions are being lost/going to be lost by the general economy. For the UK as a whole and for its future it's a complete lose lose policy - and a wicked shambles.

Edited by billybong

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Young people (under 40, lol) have the following options open to them:-

  • take on a shitload of debt buy a property in the UK, using two incomes and hope their jobs miraculously remain secure in an economy that's deeply in the crapper and propped up with tax credits and £10Bn borrowing a month.
  • rent and work in an economy that's deeply in the crapper and propped up with tax credits and £10Bn borrowing a month.
  • wait forever for an HPC (err....rent)
  • emigrate and become a digital "nomad" in a 2nd world country with decent visa options, and live very well on a meagre income, or somehow land a decent job in a relatively stable first world country (err....where is that?)

The first three options are all "Norman Normal" ones - essentially you stand inline, and get rinsed one way or another - all unshockingly unsurprising.

Edited by canbuywontbuy

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emigrate and become a digital "nomad" in a 2nd world country with decent visa options, and live very well on a meagre income, or somehow land a decent job in a relatively stable first world country (err....where is that?)

2nd world refers to communist countries.

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BTL: "picking up shillings from in front of the steam roller?"

Great analogy.

Yes its one that Bland_Unsight uses regularly, which made me think this guy has been on the forum doing his research.

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Yes its one that Bland_Unsight uses regularly, which made me think this guy has been on the forum doing his research.

I noticed that too. I thought it might even be Blandy, but pretty sure he's a civilian.

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Young people (under 40, lol) have the following options open to them:-

  • take on a shitload of debt buy a property in the UK, using two incomes and hope their jobs miraculously remain secure in an economy that's deeply in the crapper and propped up with tax credits and £10Bn borrowing a month.
  • rent and work in an economy that's deeply in the crapper and propped up with tax credits and £10Bn borrowing a month.
  • wait forever for an HPC (err....rent)
  • emigrate and become a digital "nomad" in a 2nd world country with decent visa options, and live very well on a meagre income, or somehow land a decent job in a relatively stable first world country (err....where is that?)

The first three options are all "Norman Normal" ones - essentially you stand inline, and get rinsed one way or another - all unshockingly unsurprising.

Pretty much nail on head. Im looking at the Netherlands as the last option.

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Yes its one that Bland_Unsight uses regularly, which made me think this guy has been on the forum doing his research.

Taleb quote from "Fooled by Randomness" if I remember rightly. I don't know if he made it up.

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I noticed that too. I thought it might even be Blandy, but pretty sure he's a civilian.

It ain't me.

There are a great many people calling the matter the same way, (I'm just gobby and here). I picked up the steamroller quip from Taleb, (see here). I always felt that it applied very well to the BTL crowd who acted (and talked) as if they were taking no risk and could only interpret anyone else's horror at the risks they were taking in terms of jealousy, ignorance and spite.

What particularly tickles me is that you not only have the mechanism of the supposedly unexpected event all mapped out (price falls then margin calls, then a fire sale) but it already happened to some investors in 2008-2009 and the Treasury and Bank of England are talking openly about the mechanism in broad terms (even if they pass over the details), see, for example the impact assessment for the FPC powers of direction consultation.

What also tickled me was that the last time it was mentioned over at PovertyLater Busta chipped in to say that the margin call clauses are rare even though they look to be standard (and from talking to a pal with more experience of these matters would be standard in a secured commercial mortgage (which is after all exactly what a BTL mortgage is... :rolleyes: ).

Any really thoughtful BTL investor ought to see this. It is all true. BTL is an accident waiting to happen. It happened already but measures to defend the banking system called a halt to proceedings somewhat prematurely. I used to work in a rather more rough and ready job than my present employment and I relied on two golden rules; Don't f**k around, and don't take the p!ss. Getting into BTL at all is f**cking around, taking chances that can blow up in your face because of laziness or stupidity. Staying leveraged in the BTL game after 2008 is taking the p!ss. You've already got away with f**king around once, but now you propose to keep f**king around anyway. That's dumb, and if you do that you deserve to get burned.

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[ARTICLE FT] (It begins)

Source : http://www.ft.com/cms/s/0/a039b728-c067-11e5-846f-79b0e3d20eaf.html#ixzz3yGLSqKx1

This week I feel a bit embarrassed. Some readers might remember a column I wrote some years ago about buying a large house in Edinburgh. It was, I said at the time, likely to be one of the worst financial decisions ever but my family needed to nest — so we wanted to own a house.

It hasn’t turned out to be completely awful. We could probably sell it for roughly what we bought it for in nominal terms. So we are only down about 15 per cent in real (inflation adjusted) terms. I’ve made worse decisions. So that’s not the embarrassing bit. It is: we just bought a tiny studio flat in London. When I say tiny, I mean tiny. The entire thing is around the size of our family bathroom up north.

But still, given my firm and often expressed view that London property is hideously overvalued, you’ll be wondering what on earth I am thinking. The answer, once again, is domestic. I travel up and down the east coast of the UK like a yo-yo. I need somewhere to leave my “giving a talk” clothes and heels that isn’t the lost property department of Virgin East Coast rail, and somewhere to sleep when I miss the last train to Scotland. It’s a utility purchase I intend to depreciate over 20 years, not an investment.

I’m telling you this dull stuff about my personal life not, sadly, because I think you will be particularly interested but because the rest of this column is about the London property market and I want to pre-empt a Twitter row about why I don’t follow my own advice. I’ve just told you why. So, onwards.

Here’s a chart showing the relationship between average London property prices and those in the rest of the country. You’ll see a pretty clear cycle. The gap widens. Then it reverts to around the mean. Then it widens. And then it reverts. Today it is wider than it has ever been: the line showing London prices soars up, up and away.

There’s a clear message in there for anyone who believes in reversion to the mean: sell your house in London and buy one in the country. But this chart isn’t the only thing sending that message. There is also the basic economic truth about demand creating its own supply. You’ll have heard a lot of talk over the years about how it isn’t possible to substantially raise the supply of housing in London. But a PropertyVision report out this time last year proved that to be nonsense: it noted that “the sheer scale and monumentality of the towers that are rising daily is in a league of its own” and counted 54,000 new flats on the way in central London.

Anyone who keeps an eye on planning applications — or for that matter the Homes & Property section of the Evening Standard — will know that number has been rising steadily: there are 10,000 new flats planned on public land around Wormwood Scrubs, for example. Transport improvements are also making areas once thought of as outer London as commutable as parts of central London — something that Crossrail will do even more to emphasise.

So we have a price signal here (too high) and we have a supply signal (lots coming) too. Next up is a policy signal. The government is not keen on super high house prices in London. It looks bad. So they have been working to discourage foreign buyers with the higher stamp duty rates and the annual tax on enveloped dwellings (Ated) for houses bought inside companies. They also hit the market with the new rates of stamp duty for houses worth £1.5m plus and told us that anyone buying a second home would be paying 3 per cent extra from April. house prices really seems very clear. Crash. Crash. Crash. And a few extra sleepless nights for me in my cramped and airless little studio

London used to be lightly taxed by international super city standards. Add the nasty cuts in tax relief on buy-to-let interest and it clearly isn’t any more.

That’s three signals for you. The fourth comes from the market. London has long been a lovely haven for international buyers. But with commodity prices collapsing and China slowing, the bread and butter of the high-end market isn’t as well off as it was: no Russian oil billionaires are going to spend £60m on a penthouse apartment in Hyde Park this year. Quite the opposite: I’ve already heard of several massive price cuts from “distressed sellers”. The great unwinding of the global credit bubble can take London houses down with it just as easily as it can take steel mills.

The fifth is obvious — interest rates. The base rate in the UK remains 0.5 per cent. According to the Taylor Rule (a pretty well accepted monetary policy rule that suggests what interest rates in any one country should be) it should be 4.2 per cent. Yikes. Add it all up and the future for London house prices really seems very clear. Crash. Crash. Crash. And a few extra sleepless nights for me in my cramped and airless little studio.

But here’s the thing. I can’t be absolutely certain on all this. One of the things I missed in the post-crisis period was just how global a market London is. So it makes sense to look at prices in currencies other than sterling. Do that and prices haven’t budged much since 2011: a friend who bought then in Notting Hill reckons he is just about even in dollars. Foreign buyers will see London as more taxed than it was, but not necessarily more expensive.

I’m also unnerved by the Swiss question. FT readers will have seen the story earlier in the week about the tax authorities there urging people to withhold their payments until the last minute. Why? Negative interest rates mean they don’t want to hold the cash — they want the taxpayers to take the hit instead. If the current market corrections turn into full-blown chaos, we know what central banks around the world will do. Taylor rule be stuffed, they’ll cut rates and print money. And if they do that no one will want cash. We will all move into more and more risky investments to avoid having it — London property could still be one of those investments.


As does this idea: if people are moving out of London to buy gorgeous houses in Suffolk and Somerset but are still working in London, what will they need? Studios. Perhaps the reversion to the mean caused by people selling big houses in Notting Hill will also mean a bull market in tiny studios. Here’s hoping.If I had £4m to buy a house in London now would I buy one? No. Absolutely not. No way. And, just to be clear, if I wasn’t long-distance commuting, I wouldn’t buy a studio either. But at least thinking about the increasingly bonkers nature of the global economy gives me a straw to grasp at, given that I have.

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But a PropertyVision report out this time last year proved that to be nonsense: it noted that “the sheer scale and monumentality of the towers that are rising daily is in a league of its own” and counted 54,000 new flats on the way in central London.

It will be interesting to see how many of those flats will be 40% funded by the taxpayer

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It will be interesting to see how many of those flats will be 40% funded by the taxpayer

When I heard about 40% HTB in London only, I immediately correlated that with the much talked about glut of these luxury flats coming online in London. Are there any significant amounts of new houses being built in the qualifying area?

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When I heard about 40% HTB in London only, I immediately correlated that with the much talked about glut of these luxury flats coming online in London. Are there any significant amounts of new houses being built in the qualifying area?

The article says central London that is HTB 40% territory

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When I heard about 40% HTB in London only, I immediately correlated that with the much talked about glut of these luxury flats coming online in London. Are there any significant amounts of new houses being built in the qualifying area?

I hate to say it, but central London is probably one of the only places where new build is even remotely attractive - there may be lots of dross but there are some decent new flats about, unlike the crap they build out in the shires. I'd be half tempted myself if I was younger and still living in London. As has been mentioned previously on this forum, the 40% HTB is essentially a free put on London house prices and you only have to risk 5% yourself - why not give it a punt? I don't believe you need to be a first time buyer either.

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When I heard about 40% HTB in London only, I immediately correlated that with the much talked about glut of these luxury flats coming online in London. Are there any significant amounts of new houses being built in the qualifying area?

I correlated it with a growing family that had already used Help to Buy Bail Banks for a small place, needing more space. Unless they have much better income position or been gifted a lump sum from someone, how can they afford to upsize without a larger discount?

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My point was that I that I thought the subsidy was related to the 54k luxury flats over £1m that was talked about at length on this forum and mentioned in that article.

Interestingly at the barratt link there are many that are under £1m http://www.barratthomes.co.uk/new-homes/london/why-us/help-to-buy/london-help-to-buy/?WT.mc_id=PPC__GOOGLE__Localised&WT.srch=1&srchpterm=+help++to++buy++London&srchengine=GOOGLE&srchmatch=b&gsrc=S&gclid=CL6XkqmbxcoCFVFuGwodI74MTQ&gclsrc=aw.ds&dclid=CNvRpKmbxcoCFaSG2wodMzYKvA

While there are about 54k luxury flats over 1m coming on the market, there are also appears to be a shed load of overpriced flats under 1m coming on the market.

I hate to say it, but central London is probably one of the only places where new build is even remotely attractive - there may be lots of dross but there are some decent new flats about, unlike the crap they build out in the shires. I'd be half tempted myself if I was younger and still living in London. As has been mentioned previously on this forum, the 40% HTB is essentially a free put on London house prices and you only have to risk 5% yourself - why not give it a punt? I don't believe you need to be a first time buyer either.

I agree, some of these blocks I see going up are ok (Putting the price of them aside). If I did not have kids they might appeal, however I do and the school situation is probably not that great for many of these given their locations.

Edited by Sawitcoming

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