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'soft Isn't Safe'....

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Interesting economist article that mirrors several recent threads on this site about how you can still lose a lot of money on UK housing even if prices don't fall.

I only have a print subscription but the article is at:

Soft isn't safe

A similar thread on here....

Stamp Duty Thread

Can you copy and paste for us tight subscription dodgers?

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Global house prices

Soft isn't safe

Mar 2nd 2006

From The Economist print edition

Homebuyers can lose money even if house prices do not fall

THERE have been a lot of moves up and down The Economist's global house-price league in the past couple of years. In 2003 Australia and Britain topped the table with 12-month rises of around 20%. But prices there have since levelled off and in the past year have broadly kept pace with inflation (see table). Hong Kong has also tumbled down the league: after a 30% jump in 2004, prices have risen by only 5.8% in the past 12 months and since last summer have even fallen. In the past year house-price inflation has also fallen by more than half in South Africa and China, and slowed from 17% to 13% in Spain. The new high flyer is Denmark, where prices are 17.7% higher than a year ago, followed closely by New Zealand (16.8%).

America's boom also remains strong, with prices up by 13% in the year to the fourth quarter. But there are signs that the market is cooling. Sales of existing homes fell for a fifth month in January, to the lowest for nearly two years, Stocks of unsold homes rose to 5.3 months' supply (from 3.7 a year ago), the most since 1998.

Ian Morris, an economist with HSBC bank, calculates that about half of America's housing market is experiencing a bubble, with prices overvalued by almost 40% even after taking account of low interest rates. Homes in California and Washington, DC, are overvalued by 50%.

That house prices in Britain and Australia have flattened rather than slumped has encouraged most commentators to expect a soft landing in America too. However, that could still mean a hard bump for the economy and for many homeowners.

As British property prices have levelled off, the annual growth rate of retail sales has plunged from 7% to 1%. Mr Morris calculates that even a perfect soft landing in America, with flat house prices across the country, could cause home sales to drop by 30-40%. In turn, mortgage equity withdrawal, which has been financing much consumer spending, would then dry up, creating a drag on growth equivalent to more than 3% of GDP.

British homeowners may comfort themselves that, contrary to The Economist's predictions, prices have not fallen. With homes still remarkably dear, prices could yet fall. Next worst, they could stagnate for a long time. And even then, housing investors could lose because transaction costs such as estate agents' and solicitors' fees and stamp duty are so high.

Suppose you bought a flat in London for £500,000 ($870,000) and sold it five years later for the same amount. You might think you've got your money back; in fact, you have lost a tidy sum. Suppose that you put down a deposit of £50,000 and took out an interest-only mortgage. Stamp duty, legal fees and other costs on the purchase were almost £20,000; five years' maintenance cost £10,000. Your selling costs were then, say, £15,000. Of your £50,000 deposit, you now have £5,000—a 90% loss. Had you simply put the cash in the bank, you would have made 20%.

Worse, because rental yields are so low, you have paid more in interest over the five years than you would have done in rent. In most other countries, where transaction costs are typically twice as large as in Britain, the loss could be bigger still. Investors be warned: even if prices do not fall, housing is not, so to speak, as safe as houses.

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Suppose that you put down a deposit of £50,000 and took out an interest-only mortgage. Stamp duty, legal fees and other costs on the purchase were almost £20,000; five years' maintenance cost £10,000. Your selling costs were then, say, £15,000. Of your £50,000 deposit, you now have £5,000—a 90% loss. Had you simply put the cash in the bank, you would have made 20%.

Yeah but I'm sure all of the BTL amateurs who have bought recently had already done these simple sums (and factored in possible rate rises) before they jumped on the bandwagon, so they've nothing to worry about.

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One line a mortgage is mentioned, the next it is mentioned that putting money in the bank will give a better return ... but if they take out a mortgage for the property, then I guess they have not got half amillion quid to put in a bank account to get interest on? So why woul dputting hte money in the bank be a better return?

... Or would a bank lend me half a million to put in a high interest account?

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Seems like The Economist is coming round to the idea that the bubble is too big to burst, that Governments won't let nominal house prices fall due to the significant impact this would have on economic growth. If this situation plays out then I expect interest rates to be kept below the level they should be at, and inflation will continue to pick up, hence we won't get a nominal HPC but a real-terms HPC.

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They can't stop a crash without causing far worse damage to the real economy. They might be stupid enough to destroy the real economy in order to prop up house prices for a while, but who's going to be buying 300k flats if there's no real economy left in this country?

At this point in time, there are two choices: raise rates and crash the housing market, or hold rates and crash the pound. The only question is which will the BoE do? If they were rational the answer would be obvious, but unfortunately they're not... right now we seem to be the only country in the world whose economy is in the hands of economic idiots.

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Good article and good comments. Basically shows there isn't any such thing as the often cited "soft landing". Stagnation of prices creates such stress on the economy and finances of a lot of over-geared property owners that stagnation precipitates downward forces that the government / BOE cannot hope to manage. It WILL all return to long term trend and those that haven't understood that risk getting hurt now not making a quick buck or a wonderful long term return. Those days are long gone.

They can't stop a crash without causing far worse damage to the real economy. They might be stupid enough to destroy the real economy in order to prop up house prices for a while, but who's going to be buying 300k flats if there's no real economy left in this country?

At this point in time, there are two choices: raise rates and crash the housing market, or hold rates and crash the pound. The only question is which will the BoE do? If they were rational the answer would be obvious, but unfortunately they're not... right now we seem to be the only country in the world whose economy is in the hands of economic idiots.

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Yes, good points. Although I do think the Government/central banks can hold up nominal house prices in the short run. However, you're right, in the long run this does more damage than good. I think central banks are hoping that productivity improvements can see an economy through a time when there should be a recession. I'm of the opinion that productivity improvements are more likely due to a recession. No recession in the short term equals speculation, no productivity growth, more public sector workers etc.

There will be a recession due to all this, when exactly I don't think anyone knows but you do get the feeling it's coming within the next few years.

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  • 336 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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