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Red Baron

Stagnation In Property Prices

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I had a visit yesterday from a very old friend who I had not seen for five years because he now lives in southern Germany following the acquisition of a German wife in 2001. He is in his late 50's and extremely wealthy having built up a large East Anglian construction company in the 70's and 80's which he sold in 1988. Since then he has bought and sold property and invested in a diverse range of businesses. An astute and extremely interesting man with terrific commercial savvy, it was a great pleasure to share his thoughts on a variety of topical issues which included politics, the world economy, the stock market and inevitably, the UK property market.

I asked many questions; here are a few:

Q. What is your impression of the UK property market?

A. It is probably one of the biggest bubbles in history, and a bubble which extends to many other countries in the world including the USA, Australia and large tracts of Europe. The UK bubble has created secondary bubbles in Europe, particularly in France and Spain, where UK homeowners have re-mortgaged to buy second homes in these countries.

Q. Do you own property in the UK?

A. No, following the last crash in the early 1990's I stayed clear of property until the mid 1990's when property actually looked cheap; no one wanted it. I acquired property from then up until 2000, but by 2001/2 it was obvious that a huge bubble was developing and by 2003 I had liquidated my entire portfolio.

Q. Why?

A. I have always believed that the true valuation of a property is a multiple of its rental value. When yields drop below 10% property is over-valued and it's time to move on. I won't get out of bed for a yield of less than 15% if I am taking on the responsibility and hassle of being a landlord.

Q. You can't make anything like that yield in the UK.

A. Precisely, and in my view you will never make those yields in the UK for the forseeable future, if ever. That is why I have been buying property in Germany where it is possible to make rental yields of 15-20% if you choose the right areas to buy. Property (and rents) are much lower than in UK, partly because the Germans do not share the UK obsession with ownership at any price, and partly because there is no shame in renting in Germany; it is regarded as perfectly normal! There are muted signs that property prices may rise in Germany, but I am not that convinced; Germans simply will not entertain the astronomic personal debt levels that the UK will take on, so the driver is not there to feed house price inflation on a massive scale. If German prices do rise I will make a capital gain, if not my yields will remain high; either way it's a win-win situation.

Q. So you will not be buying properties to rent in the UK?

A. Absolutely not. While over here I have looked at some of these apartments that investors are buying to rent out. I am frankly amazed at the prices and they are just rubbish - £250 per sq. ft for a small flat in a provincial town? The build costs on these can't be more than £50 per sq. ft. and the price of these places will plummet. Anyone thinking of buying UK property like this as an investment is a complete fool.

Q. So what will happen to property prices in the UK?

A. Stagnation. The glut of newbuild flats will collapse in price, 50-70% drops are easily possible because the quality is so poor; they will eventually be offloaded to local councils and housing associations at distress prices. But good quality family homes, 2, 3, 4 bed houses will hold up in price.

Q. Why?

A. Because I believe the Government, aided by the MPC, will inflate their way out of the problem they have created. Basically IRs have halved so house prices have doubled. Affordability remains the same, but debt has doubled and people do not realise that debt has to repaid. The Government will not want a property crash on their watch so they will do whatever they can to prop up the house of cards by using inflation to do the dirty work of returning property prices to historical fundamentals.

Q. House of Cards?

A. Absolutely. The UK economy is based on nothing more than people selling each other their homes at ever more inflated prices and then cashing out the perceived 'gain' by re-mortgaging to obtain spending money. UK broad money is up 8% p.a. according to one report purely as a result and the money is spent on imported motor cars and domestic goodies. Without this spending support the UK economy will simply collapse so the Government will carry on printing money and rigging the inflation figures in the hope that the real, much higher, 'background inflation' will force wages up to inflate away the country's debt.

Q. Where is your money invested?

A. 25% in German property and the rest divided roughly equally in Gold, commodities and Euros.

Phew! Well there is something there for the Bears and the Bulls to discuss. All I will say is this one smart fellow based on his track record.

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From what I'm seeing he is right. I am seeing new build flats starting to slide but decent family houses holding their value (hence the indices are showing "rises" on average). I've been thinking of German property recently. I don't suppose he mantioned where he had bought?

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It's late at night, maybe my brain is worse than usual, but if the tycoon predicts newbuild flats are to collapse in price then won't it have a knock-on effect to other flats, and if other flats drop and the vendors of those flats can't sell them for a useful figure how will they "trade up" the ladder and fund the purchase of the decent houses that are not set to drop in price like their flats have? More borrowing? But the vendors may already be in debt to their necks, how much more equity will they be able to release to bridge the gap even more to go from a depreciating flat to a price-steady house? I can't imagine it myself, though probably areas with lots of flats do of course usually see a depression of their price compared to rare (in those areas) houses anyway. The only answer I see is vendors selling their price stable houses and buying other price stable houses of equal quality in different locales, if this theory is to work. But without flat vendors trading up surely there's a question mark on prices being supported?

Someone put me straight if I've got this badly thought out!

Very good piece of writing there from you, anyway, Red Baron, like a pro journalist!

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It's late at night, maybe my brain is worse than usual, but if the tycoon predicts newbuild flats are to collapse in price then won't it have a knock-on effect to other flats, and if other flats drop and the vendors of those flats can't sell them for a useful figure how will they "trade up" the ladder and fund the purchase of the decent houses that are not set to drop in price like their flats have? More borrowing? But the vendors may already be in debt to their necks, how much more equity will they be able to release to bridge the gap even more to go from a depreciating flat to a price-steady house? I can't imagine it myself, though probably areas with lots of flats do of course usually see a depression of their price compared to rare (in those areas) houses anyway. The only answer I see is vendors selling their price stable houses and buying other price stable houses of equal quality in different locales, if this theory is to work. But without flat vendors trading up surely there's a question mark on prices being supported?

Someone put me straight if I've got this badly thought out!

Very good piece of writing there from you, anyway, Red Baron, like a pro journalist!

I think you have a point here. Although some homes will fall in price more than others I find it hard to believe that a whole section of the housing market can collapse without having an impact on the rest of the market.

If 2 bed flats collapse I think it will impact in three ways:

First - sentiment. Headlines will be screaming 'house price crash' and it will drag down the offical figures giving the impression of an over all decline in house prices.

Second - People who own them will not be able to move up putting further downard pressure on the next ladder in the housing market

Third - young people will buy them. I have said this before on another thread. There was a time when people didn't talk about house prices (yes there was...really). When we get there again and the young generation no longer have the urgency to buy a house they will look for a cheap option while they are young. TBH when I was 18/21 if I had the choice between buying a cheap 2 bed flat in the city cheaper than renting and would allow me to party - or - tie myself down with a 2 bed terrace that would take up half my take home pay and put a stop to my social life - well I know what I would have done.

Many youngsters are currently priced out of the over priced flat sector and look to buy a 2/3 bed terrace less than the cost of a newbuild flat. Soon they will be able to buy a flat without crippling themselves and this will reduce demand in the rest of the market ( of course this all depends on BTL fleeing the market).

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A. Absolutely. The UK economy is based on nothing more than people selling each other their homes at ever more inflated prices and then cashing out the perceived 'gain' by re-mortgaging to obtain spending money. UK broad money is up 8% p.a. according to one report purely as a result and the money is spent on imported motor cars and domestic goodies. Without this spending support the UK economy will simply collapse so the Government will carry on printing money and rigging the inflation figures in the hope that the real, much higher, 'background inflation' will force wages up to inflate away the country's debt.

At last....the voice of reason from a developer. This paragraph should be put in bold text on the financial pages of every UK newspaper.

Excellent assessment.

VP

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Q. House of Cards?

A. Absolutely. The UK economy is based on nothing more than people selling each other their homes at ever more inflated prices and then cashing out the perceived 'gain' by re-mortgaging to obtain spending money. UK broad money is up 8% p.a. according to one report purely as a result and the money is spent on imported motor cars and domestic goodies. Without this spending support the UK economy will simply collapse so the Government will carry on printing money and rigging the inflation figures in the hope that the real, much higher, 'background inflation' will force wages up to inflate away the country's debt.

Stark, so come on someone convince me and others that this is not the basic truth.

Because if this is all there is, how long can it continue?

Or is it that this person does not understand the new way in which an economy can successfully function?

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The only thing that I can only partly agree with is the inflation scenario....

If the government wanted to inflate peoples debts away, as opposed to just hiding inflation already present, then why would the urge the privvate sector to cap pay rises and force pay rise caps on the public sector??

Mortgage debt is only eroded by wage inflation, not inflation of the money supply, inflation of goods prices, inflation of oil prices or any other inflation.

If the government continue to fudge to inflation figures while printing lots of money, oil prices rising, gas prices rising, costs of living rising, taxes rising...... and pay rises are lower.... then what happens?? Eventually you squeeze the indebted until they burst and become bankrupt....

I could only believe this scenario if the overall inflation in the economy was made public and used to drive higher pay rises.... but the government aren't doing this, they're doing the opposite.

Maybe this is a 'brainclamp' type debt slave society that Nu-Liebour are trying to create, where burden of debts increase due to costs of living but debts aren't wiped out by inflation??

I can't see any reason for upward pressure on wages at the moment... if there was then more companies would just keep offshoring jobs.

DISCUSS?

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I have to agree with non-FTB, I don't expect the government to generate inflation to wipe out the debts.

The reason is that the high inflation would have to be brought back under control by tighter monetary policy, with the likely effect of an early 90's style recession.

Also, the high inflation would destroy the credibility of the independent bank of england leading to higher inflation expectations and higher real interest rates.

The likely effect of the above would be to destroy the reputation of the government of the day (it is worth noting that the conservatives never really recovered from the early 1990's & black (white) wednesday).

The above not withstanding, it is not impossible to see Gordon Brown trading the long term health of the country against short term political gain.

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In the old days a Chancellor could have kept rates down and encouraged a bit of inflation; but now the MPC is in charge and the process is public there's nothing Brown can do but grind his teeth and stuff the committee with as many place-men as he can find. Meanwhile inflation is down to 2% and there'll surely be a cut in the next couple of months.

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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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