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jpidding

Why A Crash Must Happen.....

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When ever, I visit my folks we always discuss house prices and the local properties for sale.

A property on their street is currently "sold STC" and has been so since October. The price on Rightmove is in the 350k region.

My parents house is nicer, but take a ballpark figure of 350k value for theirs too. Its a 4 bed detached in a nice town in East Sussex.

Whilst they were both working (now retired) they earnt a combined income of about £50k. This means that the house is now valued at 7 times their joint income. There is no way that they can afford to buy the house they live in. I think that their wages are quite typical for the area and the price of their house too.

The street is full of retired people living in houses paid for years ago, which are now at least twice as big as they need to be for 2 people.

If you take it that 3.5 times joint income is reasonable, then 175k is a better figure. With a single income the current price is at least 10 times wages.

This may take time, but the crash will come. The market is unsustainable at these levels. Spin, IR cuts, starter home schemes may delay things, but its inevitable now.

James.

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I think people putting "their pension money" into property areas mad as hatters. Returns are low, and within 3-5 years we are facing the beginning of a demographic nightmare from property. Older folks in teh baby boom generation will be looking to downsize, and there will be fewer younger folks with families of the right size to buy out those selling tehir large family homes. And properties in the suburbs may go out of favor if oil prices continue to rise, because communiting costs would skyrocket.

Agreed, there are a hell of a lot of people abandonning all other investment vehicles in favour of property. People leveraging to the hilt to get a piece of the action. Buying into the soft landing arguement (real value falls vs inflation over 10 years or so), whilst simultaneously saying they're in it for the long term. FFS assuming 10 years of equity loss AND negative cash flow it would probably take another 10 years to get back to positive territory. So no real gain for 20 years....that's in it for the long term alright!

It's tulip mania all over again.

In the meantime the paper and electronic money printing presses are running at full speed and commodities & precious metals go through the roof. I know where I'd rather have my money.

JP.

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YOU ARE RIGHT. Prices are set "on the margin", by that 5-10% being bought or sold,

not by the entire stock of houses.

If EVERYONE wanted to sell, if all the retirees started selling to downsize, then there would

be a HUGE stock of properties on the market, andf their value would be established at the level

which balances buyers and sellers, not today's level.

In years to come there will be quite a few older people who will find their pensions not enough with spiralling heating costs, huge council tax bills etc .. and all of a sudden smaller houses will seem much more attractive to heat and maintain. The only people moving in our area are people downsizing, no-one can afford to move up the chain or buy for the first time, and in a rural area although its quite pretty its going to cost a fortune in petrol aswell to get around. Interesting times ahead. ;)

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Agreed - here's my take on it from a long term perspective

Remember, outstanding mortgages of £967 bn against home values of £3400 bn - independent article - means the stock simply *cannot* change hands to the next generation at these prices.

Looking at it as a system, the only the way the stock could move on at these prices would be for mortgages for the next generation to be 3.5 times higher than they have been for the last generation (think 12 * annual salary), which a mortgage calculator at 5% tells me is 85% of take home pay. No, hang on, wait, I forgot tax. It's MORE than take home pay. It just doesn't work. And that's if the whole system 'stagnates'.

The above argument isn't quite true because it ignores those who have already paid off their houses and money that 'stays in the system'. However if we assume that mortgages must be for 25-30 years in order to borrow £3400 bn (seems plausible), and count inheritance tax / MEW then it still holds.

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YOU ARE RIGHT. Prices are set "on the margin", by that 5-10% being bought or sold,

not by the entire stock of houses.

I think people putting "their pension money" into property areas mad as hatters. Returns are low, and within 3-5 years we are facing the beginning of a demographic nightmare from property. Older folks in teh baby boom generation will be looking to downsize, and there will be fewer younger folks with families of the right size to buy out those selling tehir large family homes.

That my friend, the demographic nightmare, is very true - I think it in theory kicks in about 2010 as you say. This will create a property slide, a long slow grinding down of prices, which will go on for 20 years. Maybe 1 or 2% a year as a result of this. However, that will no doubt be balanced by periods of inflation etc, so the effect will be hidden.

It may mean that the 'real value' of houses as a % of pay falls, on the other hand I am fully expecting pay to fall over the next 20 years due to the global levelling effect. So we may end up no better off.

So 25 years from now, I agree that the property investor may well be stuffed. Unless of course the Government continues to encourage the population of the world to come to our shores in order to prop up our economy.

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That my friend, the demographic nightmare, is very true - I think it in theory kicks in about 2010 as you say. This will create a property slide, a long slow grinding down of prices, which will go on for 20 years. Maybe 1 or 2% a year as a result of this. However, that will no doubt be balanced by periods of inflation etc, so the effect will be hidden.

It may mean that the 'real value' of houses as a % of pay falls, on the other hand I am fully expecting pay to fall over the next 20 years due to the global levelling effect. So we may end up no better off.

So 25 years from now, I agree that the property investor may well be stuffed. Unless of course the Government continues to encourage the population of the world to come to our shores in order to prop up our economy.

Finally I can agree with something you've said.

Maybe I'm not thinking straight because I've got a cold/headache. :D

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When ever, I visit my folks we always discuss house prices and the local properties for sale.

A property on their street is currently "sold STC" and has been so since October. The price on Rightmove is in the 350k region.

My parents house is nicer, but take a ballpark figure of 350k value for theirs too. Its a 4 bed detached in a nice town in East Sussex.

Whilst they were both working (now retired) they earnt a combined income of about £50k. This means that the house is now valued at 7 times their joint income. There is no way that they can afford to buy the house they live in. I think that their wages are quite typical for the area and the price of their house too.

The street is full of retired people living in houses paid for years ago, which are now at least twice as big as they need to be for 2 people.

If you take it that 3.5 times joint income is reasonable, then 175k is a better figure. With a single income the current price is at least 10 times wages.

This may take time, but the crash will come. The market is unsustainable at these levels. Spin, IR cuts, starter home schemes may delay things, but its inevitable now.

James.

So you are defining a 'nice' 4 bed detached as a FTB home.

Isn't your above analysis a bit optimistic then?

A couple in their mid 60s have had >FORTY-FIVE years of earning potential between them to pay towards a 4 bed detached property.

Why do you expect to get it over 25 years (you even mentioned a single salary!) at a price of £175k?

This may take time, but the crash will come. The market is unsustainable at these levels. Spin, IR cuts, starter home schemes may delay things, but its inevitable now.

I'm afraid it isn't inevitable. It's a very real possibility but I reckon we are more likely to see a devaluation in the £ when the economy next takes a downturn. This will cause inflation and not much of a fall in prices in nominal terms. We have only had one crash where prices fell in nominal terms in the UK in recent times. The rest all got masked by inflation.

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Indeed. 4 bed detached is not a FTBer home.

However, the scenario isn't any better for people to "move up the ladder" to their

4 bed detached house at 350k is it?

The amount you have to borrow to buy the next house "on the ladder" , and the very slow depreciation of the mortgage on the current house due to low inflation all means that eventually there isnt going to be any money in the pot to afford these next houses "on the ladder" = broken ladder, HPC.

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Indeed. 4 bed detached is not a FTBer home.

However, the scenario isn't any better for people to "move up the ladder" to their

4 bed detached house at 350k is it?

The amount you have to borrow to buy the next house "on the ladder" , and the very slow depreciation of the mortgage on the current house due to low inflation all means that eventually there isnt going to be any money in the pot to afford these next houses "on the ladder" = broken ladder, HPC.

Thanks CoD for getting in there before I had a chance to revisit my link...I agree with what you say.

To expand my point a little, this situation was my parents at the end of their careers with their earnings maxed out. I am in no way saying that theirs is a typical FTB's house, but if the bulls are to be believed it only gets harder the longer you wait. So its best to buy the final house as soon as possbile. The longer you wait, the further apart the rungs get (aparently).

Lets go back a few years then. My dad was on a single income probably quivalent in todays money of about £20k. My mum was a housewife and looked after me and my brother, so no income there. We used to live in a house which was in the same town, not quite such a good area, semi detached 2.5 bedroom.

Looking at www.houseprices.co.uk I see that next door sold for £220k end of 2003 (other half of the semi). It is reasonable to assume that since HP inflation was running at about 20% at the time that it peaked at around £250+ in 2004.

So to the calculation, lets be optimistic about my dads equivalent wages when we lived there....£25k. House price £250k. So the price of the house is 10x an engineer's wage! this is a modest house, nothing special!

Someone needs to be on over £60k a year to afford this at 4x earnings.

This is just plain unsustainable.

JP.

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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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