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DT Leads With HPC Risk Story

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'The OECD’s latest economic outlook warned that an initial price correction in overvalued property markets “could be magnified by fire-sales” if investors had been “betting on continued price gains due to monetary policy support”.'

Good to see the BoE directly identified by a reputable source as the number one factor behind the asset bubble and the severity of the inevitable correction, and especially to see it far beyond the business pages.

'Mr Morris added: “We expect prices to fall next year as this slowdown works through the system. Generally the first thing to change will be the number of transactions, and then after the gap between what people will pay and how much people will accept opens up quickly and takes a while to close. Sales slow, and then there is a price adjustment.”'

The shift to crisis management is starting. This will not be gentle, it will not end in a 20% drop. This won't be a "price adjustment."

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I got butterflies in my stomach seeing that news article. The part about the adjustment hurting mainly foreign investors pleased me no end. The percentage of Chinese and Arab investors in london zones one and two feels immense. 

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The OECD has been consistent in the past 3-4 years in its warnings to the UK that property is overvalued, and I don't think they are insignificant, I think they constitute directives.

It's amusing though the way the article appears to reveal that house price drops might "actually" be beneficial to the UK economy.

I've not been the only one on this forum over the past couple of years to suggest that the foreign money fuelled HPI might be a ruse to offshore losses when the crash takes place. Good to see the value and sense in that recognised in the MSM.

But foreigners or not, that use of the word "actually" is very telling. An admission, of sorts, that "actually" maybe ever increasing prices might disadvantage a country. Actually, HPI benefits few at the expense of many. Few people have few ideas with what to do with their wealth. If you want an innovative economy, nothing makes more sense than lowering house prices so that the young have more available to invest in new ideas. I can't think of anything more likely to stifle innovation in an economy than house prices consistently outpacing earnings.

Yes, "actually" house price inflation is the biggest drain on our economy. I could not count on one hand the number of business ideas I have abandoned because I do not have the security of my own paid-for house. As I age, and prices increase, the more likely I am to to abandon them for the security of a home, and the fewer I have.

I honestly believe I could have been a real innovator if it were not for the fact that house prices have ran away so much. Perhaps I'm not ambitious enough, but I think it has killed my ambition. I'd rather take the slow but sure certainty that if I keep saving my regular income then eventually I'll own my own house over the risk that ten years of poor earnings will mean I never will.

Yeah I could have gotten investment from more wealthy people willing to take the financial risk on my behalf - and I did, the the late 90s, in a company that failed in the dot.com bust. In retrospect, I would have done so much better by sticking to my day job back then and getting a £80k mortgage which would have bought me a home I'd have to pay £400k for these days.

I would not risk such a mistake again, and so I'm here doing the day job, saving money towards a house each month. If I were my own 20 year old again, having seen the amount of HPI that has happened since the late 90s, there is no way I'd give up my job to follow a business dream the way I did then.

If you don't own your own house, then with prices increasing as they have been, the risk of foregoing a regular income for a business idea you believe in is too great. It'll take you ten or fifteen years to get back where you started, if it doesn't work out.

I was watching the "best and worst of dragons den" a couple of days ago, and it occurred to me how much of a sign of the times it is. It's very difficult these days for a young person to start their own business precisely because they have to risk owning a house to do so.

Has there ever been a dragon that is not a BTLer or landlord? I don't know. I suspect not, but actually it doesn't matter - either directly or indirectly, they are parasites, using the difficulty that those wishing to make a mark for themselves against themselves due to the fact that it is more risky than it was in the past.

How many of the dragons would have been as successful as they have been had they bought their own home with prices as they are?

It's the same old story. Take wealth away from the young in the form of outrageous house prices, and lend it back to them, for a price.

Of course lower house prices are good for the economy. It just involves letting go of a stranglehold over non-property owners that property owners are not willing to do.

It will be their undoing, I am certain.

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19 minutes ago, Grumpysod said:

 

The moment the tipping point reaches a level where the committed or forced seller becomes frightened will hopefully be the first roll of the rock on top of the snowy mountain. When it is assumed that prices will fall in the future and the mentality from the seller is to take that 5% 10% or even 15% cut in order to escape in one piece, then there is no limit to where falls might go, sentiment is everything.

 

Fingers crossed, I will believe it when I see it, but cannot see any reason why this should not happen.

There is no reason.  99% of vendors (at a guess) could sell at 30% below current prices without making a loss.

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4 minutes ago, Digsby said:

The OECD has been consistent in the past 3-4 years in its warnings to the UK that property is overvalued, and I don't think they are insignificant, I think they constitute directives.

It's amusing though the way the article appears to reveal that house price drops might "actually" be beneficial to the UK economy.

I've not been the only one on this forum over the past couple of years to suggest that the foreign money fuelled HPI might be a ruse to offshore losses when the crash takes place. Good to see the value and sense in that recognised in the MSM.

But foreigners or not, that use of the word "actually" is very telling. An admission, of sorts, that "actually" maybe ever increasing prices might disadvantage a country. Actually, HPI benefits few at the expense of many. Few people have few ideas with what to do with their wealth. If you want an innovative economy, nothing makes more sense than lowering house prices so that the young have more available to invest in new ideas. I can't think of anything more likely to stifle innovation in an economy than house prices consistently outpacing earnings.

Yes, "actually" house price inflation is the biggest drain on our economy. I could not count on one hand the number of business ideas I have abandoned because I do not have the security of my own paid-for house. As I age, and prices increase, the more likely I am to to abandon them for the security of a home, and the fewer I have.

I honestly believe I could have been a real innovator if it were not for the fact that house prices have ran away so much. Perhaps I'm not ambitious enough, but I think it has killed my ambition. I'd rather take the slow but sure certainty that if I keep saving my regular income then eventually I'll own my own house over the risk that ten years of poor earnings will mean I never will.

Yeah I could have gotten investment from more wealthy people willing to take the financial risk on my behalf - and I did, the the late 90s, in a company that failed in the dot.com bust. In retrospect, I would have done so much better by sticking to my day job back then and getting a £80k mortgage which would have bought me a home I'd have to pay £400k for these days.

I would not risk such a mistake again, and so I'm here doing the day job, saving money towards a house each month. If I were my own 20 year old again, having seen the amount of HPI that has happened since the late 90s, there is no way I'd give up my job to follow a business dream the way I did then.

If you don't own your own house, then with prices increasing as they have been, the risk of foregoing a regular income for a business idea you believe in is too great. It'll take you ten or fifteen years to get back where you started, if it doesn't work out.

I was watching the "best and worst of dragons den" a couple of days ago, and it occurred to me how much of a sign of the times it is. It's very difficult these days for a young person to start their own business precisely because they have to risk owning a house to do so.

Has there ever been a dragon that is not a BTLer or landlord? I don't know. I suspect not, but actually it doesn't matter - either directly or indirectly, they are parasites, using the difficulty that those wishing to make a mark for themselves against themselves due to the fact that it is more risky than it was in the past.

How many of the dragons would have been as successful as they have been had they bought their own home with prices as they are?

It's the same old story. Take wealth away from the young in the form of outrageous house prices, and lend it back to them, for a price.

Of course lower house prices are good for the economy. It just involves letting go of a stranglehold over non-property owners that property owners are not willing to do.

It will be their undoing, I am certain.

Great post. I'd like to add that quite a lot of successful entrepreneurs I meet owe their success in large part to property appreciation. Some of it on commercial assets but even indirectly through HPI-slanted government schemes that support their industry. It's no coincidence that success in England at least, has largely become synonymous with greedy land owner. Even if you're not. Which is a huge ******ing shame because the main edge we have had over China and the like in the past has been innovation, and as you put it, where is the money in innovation now?

Unfortunately for every business that is supported by government interference there is one or more that are being punished as a result and we end up with all the wrong sorts of success stories from all the wrong sorts of people, inspiring the next generations to follow their lead.

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The OECD’s latest economic outlook warned that an initial price correction in overvalued property markets “could be magnified by fire-sales” if investors had been “betting on continued price gains due to monetary policy support”.

 

Good.

Reminds me of Ken Clarke's recent clinic/surgery with a 11+ house BTLer hoping for sympathy about his 'plight'.

Quote

 

So in the limited time available he significantly said that:
I have read all the correspondence, but of course I don’t agree with it but it is a good Lobby.
I will follow the debate but at present I don’t think many M.Ps are picking up on this as a problem.
There is little chance of it being reversed in the Commons. I have no idea what the labour party think about it but they will not back your position. BTL landlords are preventing 1st time buyers from buying homes and that is a real social issue. (Stern confronting look).
This whole BTL thing has been gathering momentum for far too long. It should have been stopped long ago and George has sorted it. It is not the only reason that house prices have gone out of control but it is a contributing factor which needed to be addressed.
In the limited time available we came to our plight. After 11 yrs of hard work, setting up our portfolio under GAAP, we are to be robbed of £170K carry forward losses, spent to revitalise poor standard properties, now forced to sell to avoid bankruptcy at a time when our exit strategy is being dictated by the government and feel justifiably robbed. Reply; nothing but a noticeable wry smile.
--

When we mentioned our geographical spread (Liverpool to Bristol, via Cape Verde but NOT including London) he looked perplexed. Helen waded in about foreign investors, Chinese, Russians etc buying up London property.

His view? Well they all need a lesson. We are cracking down on money laundering but what we need is a big crash in house prices in London to teach these investors that they will not always make money because they think they can’t lose. Pick the bones out of that one.

https://www.property118.com/budget-2015-landlords-reactions/76164/comment-page-912/#comment-83477

 

 

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Why do they keep saying 'setting up our portfolio under GAAP'?

Its not some sort of magic term like Candyman!

The first step for GAAP is you incorporate as a company FFS.

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1 minute ago, spyguy said:

Why do they keep saying 'setting up our portfolio under GAAP'?

Its not some sort of magic term like Candyman!

The first step for GAAP is you incorporate as a company FFS.

It's total b0llocks.

The heart of the issue is that they set up the portfolios under the existing income tax framework. That remained the same between the introduction of the buy-to-let marketing enterprise by the banks and ARLA in 1996 and the introduction of Section 24 this coming April.

What they are really saying is "We thought that the personal income tax framework in relation to investment property purchased with debt, having been unchanged for twenty years, would remain the same for the next twenty years". And they were f**king wrong.

What they ought to have been lively to is that if the amount of BTL mortgage lending goes from effectively zero to over £200bn and puts a massive f**king dent in rates of home-ownership then a change in the income taxation framework becomes more and more likely.

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Super Carney to the rescue and devalue the pound further to make UK property look even more appealing?

At some point there will be a price correction and that would probably trigger another financial crisis.

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Now the public has been warned and primed about the crash, the bankers can kill it, with rate rises and reduced loose money policy. 

Only a matter of time.... 2017 could b it.

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13 minutes ago, Bland Unsight said:

What they ought to have been lively to is that if the amount of BTL mortgage lending goes from effectively zero to over £200bn and puts a massive f**king dent in rates of home-ownership then a change in the income taxation framework becomes more and more likely.

You mean, like, if you're taking candy from a baby, sooner or later the mum is likely to get pissed with all the screaming?

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Just now, Digsby said:

You mean, like, if you're taking candy from a baby, sooner or later the mum is likely to get pissed with all the screaming?

No.

If you are walking around with bigger + bigger open buckets of petrol on your head whilst smoking ...

The BoE needs to say that it will not back stop any of the BTL banks. If they fail,they are going down.

And Im including Nationwide in that group.

 

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If the bankers can't survive without their free money and the rest of society has to pay for this small section, why can't they just bet on house prices falling, then they win and everyone who hasn't got a house also wins. Many have already paid off their mortgages so would be no worse off and the few in negative equity are probably smaller than the proportion of renters who would like to buy a home to live in at an affordable price. Surely the bankers can make money on house prices collapsing too?

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5 minutes ago, spyguy said:

No.

If you are walking around with bigger + bigger open buckets of petrol on your head whilst smoking ...

The BoE needs to say that it will not back stop any of the BTL banks. If they fail,they are going down.

And Im including Nationwide in that group.

 

Nobody need take any action for that person to come a cropper though. Not that I disagree about the lenders though - that should be a given.

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18 minutes ago, fru-gal said:

If the bankers can't survive without their free money and the rest of society has to pay for this small section, why can't they just bet on house prices falling, then they win and everyone who hasn't got a house also wins. Many have already paid off their mortgages so would be no worse off and the few in negative equity are probably smaller than the proportion of renters who would like to buy a home to live in at an affordable price. Surely the bankers can make money on house prices collapsing too?

The thing is that bankers HAVE bet on falling house prices.  House prices fall, borrowers default, and the bank gets the house.  If house prices don't fall, they collect the interest on the mortgage, instead.  It's a win/win.

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Fears of a 'massive' global property price fall amid 'dangerous' "favourable" conditions and market slow-down

 

Just saying.

Edited by billybong

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16 minutes ago, richc said:

The thing is that bankers HAVE bet on falling house prices.  House prices fall, borrowers default, and the bank gets the house.  If house prices don't fall, they collect the interest on the mortgage, instead.  It's a win/win.

No.

Lending is so leveraged that a defaulting loan destroys bank capital.

 

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33 minutes ago, richc said:

The thing is that bankers HAVE bet on falling house prices.  House prices fall, borrowers default, and the bank gets the house.  If house prices don't fall, they collect the interest on the mortgage, instead.  It's a win/win.

Nail on head hence the larger deposit required especially for BTL 

20% deposit minimum plus say 5 years worth of interest payments and initial fee  ...how much dose a bank need to sell for to break even.....total guess 60-75% of purchase price

We might just get to see the biggest pump and dump in history 

Edited by long time lurking

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17 minutes ago, spyguy said:

No.

Lending is so leveraged that a defaulting loan destroys bank capital.

 

Yes, look at what happened in the US in 2007/8 when borrowers defaulted. 

As for the UK: "According to the data, the best estimate of UK banks’ latest average leverage ratio is about 3.66%. ... This leverage ratio is extremely low, relative to consensus expert opinion on what it should be for a safe and sound banking system. A widely held view among experts is that the minimum required leverage ratio should be at least 15%, with some experts arguing for much higher minimum required leverage ratios than even 15%." https://www.adamsmith.org/average-leverage-ratio/

And Mark Blyth says in his book "In 2008, the top three French banks had a combined asset footprint of 316 percent of France’s GDP. The top two German banks had assets equal to 114 percent of German GDP. In 2011, these figures were 245 percent and 117 percent, respectively. Deutsche Bank alone had an asset footprint of over 80 percent of German GDP and runs an operational leverage of around 40 to 1. This means a mere 3 percent turn against its assets impairs its whole balance sheet and potentially imperils the German sovereign. One bank, ING in Holland, has an asset footprint that is 211 percent of its sovereign’s GDP. The top four UK banks have a combined asset footprint of 394 percent of UK GDP. The top three Italian banks constitute a mere 115 percent of GDP, and yet Britain seems to get a free pass by the bond markets in comparison to Italy. The respective sovereign debts of these countries pale into insignificance."

A house price crash won't be pretty for UK banks. 

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9 minutes ago, spyguy said:

No.

Lending is so leveraged that a defaulting loan destroys bank capital.

BTLere have homes to sell to make lenders whole.   I thought that was what many of us agreed the last few years have been about - encouraging those who are financially best off to double down (into BTL or upsize etc) to shoulder the weight of HPC.

And it's the fresh lending on lower house prices at yearly high volumes of transactions that made good losses and create big gains for banking interests.  Lot of the debt was sold onto credit agencies in HPC 1990s to chase for pennies in the pound.  Although I will allow you your view on Nationwide (you have more knowledge than I).

We now have ECMD (2016) making it very difficult for non-UK earners to buy in the UK with a mortgage from a UK bank.

http://www.propertytribes.com/countdown-to-mortgage-credit-directive-mcd-t-127624200.html

One bank in Singapore froze lending for London property after Brexit..... can't imagine many lenders eager to lend into a falling market, when it begins.

Mortgages have value on books... HPC and who wants to turn £1 of loan into 70p or 60p, if/when HPC begins.      

Quote

 

The psychological aspect of deflation and depression cannot be overstated. When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending. As debtors and potential debtors become more conservative, they borrow less or not at all. As producers become more conservative, they reduce expansion plans. As consumers become more conservative, they save more and spend less. These behaviors reduce the "velocity" of money, i.e., the speed with which it circulates to make purchases, thus putting downside pressure on prices. These forces reverse the former trend.

-Elliottwave

 

 

Quote

 

The timidity of the banking system appears to have been general and widespread. Indeed, the 1939 survey found that over half the reasons given for credit refusals by banks were "bank policy"; only a third were because of "the condition of the borrowing concern."

-Michael A.Bernstein
The Great Depression

 

Quote

 


With the value of real estate collateral falling, the true market value of construction and real estate loans will fall. Bankers and other lenders, like their predecessors after 1929, will not wish to magically turn one dollar of cash into a loan worth eighty cents, much less sixty cents.

When the value of collateral falls, and the public's demand for saving safety rises, even easy money may not stop deflation.

 

 

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3 minutes ago, Tempus said:

The top four UK banks have a combined asset footprint of 394 percent of UK GDP. The top three Italian banks constitute a mere 115 percent of GDP, and yet Britain seems to get a free pass by the bond markets in comparison to Italy. The respective sovereign debts of these countries pale into insignificance."

A house price crash won't be pretty for UK banks. 

..and yet they are hard stress tested for HPC and lot more - and many banks passing the tests, or close to it.

November 2016

Quote

has also incorporated domestic factors: a 31% fall in house prices, 42% reduction in commercial property prices with the economy contracting by 4.3% and unemployment rising by 4.5 percentage points. The dollar rises against emerging market currencies and the oil price troughs at $20 per barrel.

And back in March/April 2016... I think the authorities would be happy about a HPC in many areas of the UK.

Sir John Cunliffe, Deputy Governor of the Bank of England (Financial Stability)

Quote

Sir Jon Cunliffe: The other thing that has come in increasingly over the last 15 years is not owners occupiers but buy to let. Virtually all the growth in mortgages over the last few years has come from buy to let, not owner occupier.

..Sir Jon Cunliffe: A lot of the growth that we have seen has been because this has looked to be an asset that gives relatively good return at a time when many other assets - pensions or otherwise - are not giving a good return.

- re long passage on BTL / not knowing how BTLers-landlords would react / different opinions OBR vs Council of Mortgage Lenders and others =

..Sir Jon Cunliffe: Of course, you also need to estimate whether, if a number of buy-to-let landlords with mortgages exit the market and the flow of new buy-to-let mortgages goes down because of the extra stamp duty, that means more first-time buyers coming into the market because there is a slowing in house-price growth.

 

Also Merv the other week welcoming the prospect of house prices falling.  "We've been trying to achieve lower house prices"  (or words to that - see video)

:) :o

Core voter that!

 

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