Jump to content
House Price Crash Forum

Recommended Posts

A large proportion of first time buyers have been priced out of the market. Many of those who manage to buy are doing so by saving for longer and/or raising money from relatives. BTLs who buy today are also having difficulty in breaking even (yield of 6%+). Buyers can be categorised into four groups:

(1) Those who have committed themselves to more than they can afford

(2) Those who can afford their house and are unconcerned about losing money

(3) Speculative buyers (such as BTL)

(4) Buyers who can afford to buy and believe it will be more difficult to get on the ladder later

Whatever happens, people in group 1 are destined to lose their houses and this group will grow as interest rates rise. The second group are a small minority of people who have little concern about money.

Groups 3 and 4 make up the majority of buyers. If the public perception is that house prices have stopped rising group 3 will start selling and group 4 will stop buying.

How could prices stand still given that so much of today's prices are linked to speculative expectation. Surely when the market is seen to have stopped rising, it will have to fall.

Share this post


Link to post
Share on other sites

Let's add:

(5) Buyers who will postpone purchase because property is unaffordable

(6) Buyers who think prices will eventually moderate (us lot) and are waiting till they are affordable once again.

Share this post


Link to post
Share on other sites

The only way were are going to get the HPC we want is for BOE to raise IR sharply - and that, under current macroeconomic conditions, is not going to happen

Inflation is taking the brunt ATM...

Edited by dnd

Share this post


Link to post
Share on other sites

Don't discount rising energy prices as these are having much the same effect on households, not just those with big mortgages. I don't know what the average energy increase has been on householders expenditure since the last rate cut a year ago, but it could quite concievably be equal to a 0.25/0.5 base rate rise had energy prices stood still. Then look at fiscal drag, council tax rises and other stealth taxes and you see householders slowly being financially cripled even though their mortgage payments are unchanged - the fact that it's not IR rises doing the damage does'nt matter as the effect is the same. Very small rate rises now will have a big effect and the real risk IMO is that the BOE will try to leave rates on hold for too long and then have to deal with too much inflation already in the system at a future date leading to a sucession of small monthly rises as in the US.

Agree, they have a difficult balancing act of curbing spending to stop real inflation before it reaches stupid levels while not crashing the housing market and dealing with future inflation issues like energy

They also have political (middle east issues pushing up oil prices?) and human psychological factors (will people stop spending?) to take on board

Energy inflation is a critical issue as it's worldwide and GB/BOE can't do anything about it - imported electronic goods measured on the current CPI are even pushing up the skewed official figures - a PR disaster

The last thing the BOE/GB want is for the public to be aware of rising inflation - they want them concentrated on the IR figure

We'll soon get an idea of how good/lucky? they are over the next year or two....

Edited by dnd

Share this post


Link to post
Share on other sites

Let's add:

(5) Buyers who will postpone purchase because property is unaffordable

(6) Buyers who think prices will eventually moderate (us lot) and are waiting till they are affordable once again.

1-4 are the people still buying. I would argue that your 5 and 6 qualify as non buyers (for the moment anyway). As time progresses, more people will joint 5 and 6.

Share this post


Link to post
Share on other sites

A large proportion of first time buyers have been priced out of the market. Many of those who manage to buy are doing so by saving for longer and/or raising money from relatives. BTLs who buy today are also having difficulty in breaking even (yield of 6%+). Buyers can be categorised into four groups:

(1) Those who have committed themselves to more than they can afford

(2) Those who can afford their house and are unconcerned about losing money

(3) Speculative buyers (such as BTL)

(4) Buyers who can afford to buy and believe it will be more difficult to get on the ladder later

Whatever happens, people in group 1 are destined to lose their houses and this group will grow as interest rates rise. The second group are a small minority of people who have little concern about money.

Groups 3 and 4 make up the majority of buyers. If the public perception is that house prices have stopped rising group 3 will start selling and group 4 will stop buying.

How could prices stand still given that so much of today's prices are linked to speculative expectation. Surely when the market is seen to have stopped rising, it will have to fall.

Please define what you refer to as a 'flat market'

Also, BTL LLs will keep hold of their properties (generally) even if prices fell 10% nominally.

Many couldn't take the cashflow hit of trying to sell. As long as they have a tenant paying the rent they will tend to stick it out for the long term. Even if that means losing money each month in the short term. Unless you think they are only in it for a totally 'free' pension?

Share this post


Link to post
Share on other sites

Please define what you refer to as a 'flat market'

Also, BTL LLs will keep hold of their properties (generally) even if prices fell 10% nominally.

Many couldn't take the cashflow hit of trying to sell. As long as they have a tenant paying the rent they will tend to stick it out for the long term. Even if that means losing money each month in the short term. Unless you think they are only in it for a totally 'free' pension?

By flat market I mean house prices rising by inflation or less.

I cannot agree with your second comment. Many of the recent entrants to the BTL market are expecting 'instant windfalls'. When these don't emerge, they will get fed up and a flood of properties will go back on the market.

Share this post


Link to post
Share on other sites

The only way were are going to get the HPC we want is for BOE to raise IR sharply - and that, under current macroeconomic conditions, is not going to happen

Inflation is taking the brunt ATM...

A flat market is the most unlikely scenario in my opinion.

Share this post


Link to post
Share on other sites

Many couldn't take the cashflow hit of trying to sell. As long as they have a tenant paying the rent they will tend to stick it out for the long term.

Ah... the long term!

'As long as they have a tenant' being the major factor.

Share this post


Link to post
Share on other sites

Please define what you refer to as a 'flat market'

Also, BTL LLs will keep hold of their properties (generally) even if prices fell 10% nominally.

Many couldn't take the cashflow hit of trying to sell. As long as they have a tenant paying the rent they will tend to stick it out for the long term. Even if that means losing money each month in the short term. Unless you think they are only in it for a totally 'free' pension?

BTL's will be in a very dangerous position. If they enter negative equity and the rents they can demand fall as property prices fall they may well try to continue even though they will lose money each month. BUT, they can do this for a short while (for most of them anyweay) and at the same time they will be contributing to a recession as their personal 'disposal income' will be severely damaged and the accummulation of this amongst all the new BTLr's will dent consumer spending.

Their tenants would start to eye up the market with thoughts of buying as property values became more affordable and if this situation arose the more recent BTLr's who have bought in the last 3 years would start a panic to get out. Obviously this is only one possible scenario, but you cannot just look at the market and say they will 'hold their properties'. It might not work out so easy in reality to do this.

AFP

Share this post


Link to post
Share on other sites

A flat market is the most unlikely scenario in my opinion.

I agree. I haven't seen any evidence to suggest this is likely to happen.

BTL's will be in a very dangerous position. If they enter negative equity and the rents they can demand fall as property prices fall they may well try to continue even though they will lose money each month. BUT, they can do this for a short while (for most of them anyweay) and at the same time they will be contributing to a recession as their personal 'disposal income' will be severely damaged and the accummulation of this amongst all the new BTLr's will dent consumer spending.

Their tenants would start to eye up the market with thoughts of buying as property values became more affordable and if this situation arose the more recent BTLr's who have bought in the last 3 years would start a panic to get out. Obviously this is only one possible scenario, but you cannot just look at the market and say they will 'hold their properties'. It might not work out so easy in reality to do this.

AFP

Agreed. It does seem peculiar to think that people will hang on to their properties even when making substantial losses (any loss each month isn't worth it). It seems most likely they'd want to cut losses and get out into something profitable than increase losses by kidding themselves they're in it 'for the long term'. The longer they're in it, the more they lose.

Share this post


Link to post
Share on other sites

By flat market I mean house prices rising by inflation or less.

I cannot agree with your second comment. Many of the recent entrants to the BTL market are expecting 'instant windfalls'. When these don't emerge, they will get fed up and a flood of properties will go back on the market.

Property flippers and developers are the ones after quick windfalls.

A BTL who sells quickly faces mortgage default charges, voids for maybe 4 months whilst they try to sell. Agency fees, legal fees and also costs in preparing the property for sale.

That dents the cashflow badly.

eg LL buys BTL for £170k with £50k deposit. (borrow £120k) Rental income £8500 pa.

IO loan = £6000 pa.

Maintenance/costs = £1200pa

Income before tax = £1300 pa

Let's say he sells when prices fall to £150k

If he walks away with any equity at the end of it what will he get from it? Eg £20k only nets about £800 pa interest after tax. Not much good for a pension and LESS than he was getting from his tenant.

That £20k will shrink in value with inflation as well.

If it 'cost' £30k in (fees/costs/house price losses/returned tenant deposit) to get back that £20k of equity then is is worth it?

Surely it is better to tough it out and keep the BTL.

Don't forget, any money that the LL has to pay out each month (if the rent+maintenance+costs doesn't cover the mortgage) can be logged and deducted as costs against any capital gains tax they get when they sell in 15-20 yrs' time. (most will choose to offset these losses against any tax due on future rental income once thay go back into the black each month)

In the example given, the rent would have to fall QUITE A BIT to put that LL in the red each month. So why sell?

Edited by Without_a_Paddle

Share this post


Link to post
Share on other sites

Property flippers and developers are the ones after quick windfalls. A BTL who sells quickly faces mortgage default charges, voids for maybe 4 months whilst they try to sell. Agency fees, legal
BTLs invariably say they are in it for the long term. They have to say this for fear of looking foolish. The real truth is that virtauly of them want (and need to see) a large capital gain to convince them to stay the course. If that doesn't arrive, they will be bailing out on mass.
any capital gains tax they get when they sell in 15-20 yrs' time.
This assumes that they will see capital gains. If they had gone into Japanese property 15 years ago they would facing a massive capital loss.

Share this post


Link to post
Share on other sites

Please define what you refer to as a 'flat market'

Also, BTL LLs will keep hold of their properties (generally) even if prices fell 10% nominally.

Many couldn't take the cashflow hit of trying to sell. As long as they have a tenant paying the rent they will tend to stick it out for the long term. Even if that means losing money each month in the short term. Unless you think they are only in it for a totally 'free' pension?

A BTL might not have any choice but to sell their property. My landlord has a chain of properties all secured against each other and all with IO mortgages. If he has a void and can't pay one of the mortgages and his bank defaults he may be forced to sell his properties. Whether he wants to stay in it for the long term or not would be irrelevant. Look at the links of our IT BTL amateur on the BBC website for an example. BTLs are the most vulnerable. Not to mention what would happen if IRs went up. That will have maximum effect on an IO mortgage. I shall be telling him where to go if he tries to pass any IR rises higher than the CPI inflation on through my rent to cover his ass.

Share this post


Link to post
Share on other sites

BTLs invariably say they are in it for the long term. They have to say this for fear of looking foolish. The real truth is that virtauly of them want (and need to see) a large capital gain to convince them to stay the course. If that doesn't arrive, they will be bailing out on mass.

This assumes that they will see capital gains. If they had gone into Japanese property 15 years ago they would facing a massive capital loss.

Well, assuming they HAVE just bought a BTL, let's look at another example.

Consider a 'speculative BTL' who is in it up to his neck right now.

For whatever reason he has a £170k BTL, and gets £8500pa rent.

His IO loan (fixed rate) is £8000 pa

Prices slide by £25k so he decides to sell up. (but it takes 5 months to sell :( )

I reckon he will be £30k in the red as he hands over the keys to the next owner of the house.

Before selling up he was probably sinking by £1500 pa (don't forget this loss is deductable from future CGT) if you include maintenance etc.

Now he just has a £30k debt.

He takes out an unsecured repayment loan to pay it off over 10 years. this will be around £350pm or £4200pa assuming a 7% IR and there is NOTHING to show for it after 10 years.

Do you still think the BTLs are going to flee for the exits if/when prices falter?

They would be better off reducing the rent (or, if they have any sense, they should be buttering up their tenant with 'extra' (tax deductable) maintenance such as new fittings etc at no increase in rent)

Share this post


Link to post
Share on other sites

A BTL might not have any choice but to sell their property. My landlord has a chain of properties all secured against each other and all with IO mortgages. If he has a void and can't pay one of the mortgages and his bank defaults he may be forced to sell his properties. Whether he wants to stay in it for the long term or not would be irrelevant. Look at the links of our IT BTL amateur on the BBC website for an example. BTLs are the most vulnerable. Not to mention what would happen if IRs went up. That will have maximum effect on an IO mortgage. I shall be telling him where to go if he tries to pass any IR rises higher than the CPI inflation on through my rent to cover his ass.

That's true - this is discussed by some as though they have a choice but of course, many won't.

BTLs will try to sell. Why hang on to something that costs money when your aim is to make it? And bulls.... don't bother trying to answer that they're in it for the long term!

Share this post


Link to post
Share on other sites

A large proportion of first time buyers have been priced out of the market. Many of those who manage to buy are doing so by saving for longer and/or raising money from relatives. BTLs who buy today are also having difficulty in breaking even (yield of 6%+). Buyers can be categorised into four groups:

(1) Those who have committed themselves to more than they can afford

(2) Those who can afford their house and are unconcerned about losing money

(3) Speculative buyers (such as BTL)

(4) Buyers who can afford to buy and believe it will be more difficult to get on the ladder later

Whatever happens, people in group 1 are destined to lose their houses and this group will grow as interest rates rise. The second group are a small minority of people who have little concern about money.

Groups 3 and 4 make up the majority of buyers. If the public perception is that house prices have stopped rising group 3 will start selling and group 4 will stop buying.

How could prices stand still given that so much of today's prices are linked to speculative expectation. Surely when the market is seen to have stopped rising, it will have to fall.

Hi fully agree that the BTL will be in trouble, well those who bought recently. Let's face it, people who did invest say 5 years ago are big winners; e.g. I rent 495£ for a studio that did cost 56000£. REturn is quite good in this case.

But now, one would be crazy to do it, far to risky, the same studio is valued about 105000!!

TWT

Share this post


Link to post
Share on other sites

A BTL might not have any choice but to sell their property. My landlord has a chain of properties all secured against each other and all with IO mortgages. If he has a void and can't pay one of the mortgages and his bank defaults he may be forced to sell his properties. Whether he wants to stay in it for the long term or not would be irrelevant. Look at the links of our IT BTL amateur on the BBC website for an example. BTLs are the most vulnerable. Not to mention what would happen if IRs went up. That will have maximum effect on an IO mortgage. I shall be telling him where to go if he tries to pass any IR rises higher than the CPI inflation on through my rent to cover his ass.

Fair enough (note that I did say "as long as he has a tenant").

Even if prices were rising you would still have to sell up if you had long voids. (i.e. you would have no choice)

Share this post


Link to post
Share on other sites

BTL's will be in a very dangerous position. If they enter negative equity and the rents they can demand fall as property prices fall they may well try to continue even though they will lose money each month. BUT, they can do this for a short while (for most of them anyweay) and at the same time they will be contributing to a recession as their personal 'disposal income' will be severely damaged and the accummulation of this amongst all the new BTLr's will dent consumer spending.

Their tenants would start to eye up the market with thoughts of buying as property values became more affordable and if this situation arose the more recent BTLr's who have bought in the last 3 years would start a panic to get out. Obviously this is only one possible scenario, but you cannot just look at the market and say they will 'hold their properties'. It might not work out so easy in reality to do this.

AFP

Are you assuming that everyone in rented accommodation will buy at first signs of a falling market? Or will all the renters know when the market as bottomed? Or are prices never going to stop falling and start rising again? We hear all the time on this site the market runs in cycles and what goes up must come down hence the "imminent" HPC. What about the next rising cycle? In a falling market surely we can expect less buyers and therefore more people renting?

And why the generalisation that any property purchased in the last 3 years would suddenly become unrealistic to hold?

Share this post


Link to post
Share on other sites

Are you assuming that everyone in rented accommodation will buy at first signs of a falling market? Or will all the renters know when the market as bottomed? Or are prices never going to stop falling and start rising again? We hear all the time on this site the market runs in cycles and what goes up must come down hence the "imminent" HPC. What about the next rising cycle? In a falling market surely we can expect less buyers and therefore more people renting?

And why the generalisation that any property purchased in the last 3 years would suddenly become unrealistic to hold?

MM,

First, everything is generalisations because we are talking about the 'whole market' and not a specific circumstance. To answer you questions (from my perspective)

1. I'm asumming nothing, but feel that it is a fair guess that there are many people renting who will start to consider the possibility of purchasing if prices start to fall. Everyone as their own opinion on value, so some will buy when they can afford to even if prices might fall further, whilst others wait etc etc.

2. Seeing the bottom of the market will be 'judgement call' again something that buyers will do any different stages. Just like with stock market peaks and troughs.

3. Prices will always stop falling, there always comes a time when a recovery will be induced no how bad things get.

4. The next rising cycle is impossible to see/predict/consider from our current point in time/on the cycle.

5. If the market does start to fall who knows what we will see. The ratio of buyers:sellers will be dependant on so many issues, and it especially dependant on the speed of the fall. I feel there would be less buying/selling fullstop as there will be many people unable to move due to equity issues and many people who stay in their current situation whilst they make their own judgement on whether they want to buy etc etc. There well could be more renters if the market keeps falling and people become convinced that they could get it cheaper in 6 months. I'm sure the equations on how Supply/Demand meet with BTL yield potentials, affordability, inflation, IR's, unemployment rates etc etc are very complex and hard to model on how they might interact in the actual circumstances that might present themselves in a UK falling market at 'x' months/years in the future!

3. The reason why I mention the last 3 years is simply because these are the properties with the premium equity that will get wiped out first if there is a crash. As you go back in years to the bottom of the last cycle, the buyers have a bigger cushion of equity with which to cushion themselves with if the house prices start to tumble. I'm not saying it would be unrealistic to hold, just that in a falling market these purchases will see trouble first. Just look at the graph on the front of the site.

Thats just my view in relation to your questions.

AFP

Share this post


Link to post
Share on other sites

MM,

First, everything is generalisations because we are talking about the 'whole market' and not a specific circumstance. To answer you questions (from my perspective)

1. I'm asumming nothing, but feel that it is a fair guess that there are many people renting who will start to consider the possibility of purchasing if prices start to fall. Everyone as their own opinion on value, so some will buy when they can afford to even if prices might fall further, whilst others wait etc etc.

2. Seeing the bottom of the market will be 'judgement call' again something that buyers will do any different stages. Just like with stock market peaks and troughs.

3. Prices will always stop falling, there always comes a time when a recovery will be induced no how bad things get.

4. The next rising cycle is impossible to see/predict/consider from our current point in time/on the cycle.

5. If the market does start to fall who knows what we will see. The ratio of buyers:sellers will be dependant on so many issues, and it especially dependant on the speed of the fall. I feel there would be less buying/selling fullstop as there will be many people unable to move due to equity issues and many people who stay in their current situation whilst they make their own judgement on whether they want to buy etc etc. There well could be more renters if the market keeps falling and people become convinced that they could get it cheaper in 6 months. I'm sure the equations on how Supply/Demand meet with BTL yield potentials, affordability, inflation, IR's, unemployment rates etc etc are very complex and hard to model on how they might interact in the actual circumstances that might present themselves in a UK falling market at 'x' months/years in the future!

3. The reason why I mention the last 3 years is simply because these are the properties with the premium equity that will get wiped out first if there is a crash. As you go back in years to the bottom of the last cycle, the buyers have a bigger cushion of equity with which to cushion themselves with if the house prices start to tumble. I'm not saying it would be unrealistic to hold, just that in a falling market these purchases will see trouble first. Just look at the graph on the front of the site.

Thats just my view in relation to your questions.

AFP

The graph on the front of the site is 'adjusted' for inflation.

If they plotted nominal house prices in £££ then the graph would look very different and they would probably not wish to show it on the front page.

Both types of graph can be misleading, but one 'looks better' if you are a HPC believer.

Share this post


Link to post
Share on other sites

Nothing to do with HPC belief.

If you really think a nominal graph is comparable to a real one, then a current millionaire is comparably wealthy to my great grandfather who was a millionaire at the turn of the (19th to 20th) century.

I don't think that was the point being made. Regardless of how you interpret the numbers, if inflation is positive then converting from nominal to real figures will flatten out the rises and steepen the drops. The visual impact of this is to make crashes appear larger to a casual observer. This is no different to charts I've seen in the media that plot HPI instead of house prices. Then when HPI slows the chart appears to drop, even though house prices are still rising, allowing them to make a sensationalist story out of nothing. Its all about showing the information in a format that best suits the story you are trying to tell.

Share this post


Link to post
Share on other sites

Nothing to do with HPC belief.

If you really think a nominal graph is comparable to a real one, then a current millionaire is comparably wealthy to my great grandfather who was a millionaire at the turn of the (19th to 20th) century.

Like I said, both can be misleading. However, AFP appeared to be using the inflation adjusted graph to indicate resistance to negative equity for recent homebuyers assuming a fall in prices.

IMO a graph showing monthly affordability for a FTB would be of more use. This is arguably the best yardstick for judging if houses are spiralling out of reach. Of course, this graph would have its faults too. But then you can always 'fix the scaling' for your own case if you choose a long term fixed rate loan when you buy.

Share this post


Link to post
Share on other sites

MM,

First, everything is generalisations because we are talking about the 'whole market' and not a specific circumstance. To answer you questions (from my perspective)

1. I'm asumming nothing, but feel that it is a fair guess that there are many people renting who will start to consider the possibility of purchasing if prices start to fall. Everyone as their own opinion on value, so some will buy when they can afford to even if prices might fall further, whilst others wait etc etc.

2. Seeing the bottom of the market will be 'judgement call' again something that buyers will do any different stages. Just like with stock market peaks and troughs.

3. Prices will always stop falling, there always comes a time when a recovery will be induced no how bad things get.

4. The next rising cycle is impossible to see/predict/consider from our current point in time/on the cycle.

5. If the market does start to fall who knows what we will see. The ratio of buyers:sellers will be dependant on so many issues, and it especially dependant on the speed of the fall. I feel there would be less buying/selling fullstop as there will be many people unable to move due to equity issues and many people who stay in their current situation whilst they make their own judgement on whether they want to buy etc etc. There well could be more renters if the market keeps falling and people become convinced that they could get it cheaper in 6 months. I'm sure the equations on how Supply/Demand meet with BTL yield potentials, affordability, inflation, IR's, unemployment rates etc etc are very complex and hard to model on how they might interact in the actual circumstances that might present themselves in a UK falling market at 'x' months/years in the future!

3. The reason why I mention the last 3 years is simply because these are the properties with the premium equity that will get wiped out first if there is a crash. As you go back in years to the bottom of the last cycle, the buyers have a bigger cushion of equity with which to cushion themselves with if the house prices start to tumble. I'm not saying it would be unrealistic to hold, just that in a falling market these purchases will see trouble first. Just look at the graph on the front of the site.

Thats just my view in relation to your questions.

AFP

AFP, appreciate the considered responses.

totally agree with the buy/sell inactivity, people just wouldn't sell for 10-50% less (not my percentages!), some may be forced by repossesion. Repossesion rocketed during the last HPC and some people beleive this contributed further to the apparent drop in house prices because of the ridiculous levels lenders resold these properties, something that is unlikely to happen this time round as the very nature of dealing with the sale os=f repossesions as changed and lenders search for higher returns on the sale and actively encourage gazumping.

With reference to the graph and peoples reliance on the previous cyclic nature of house prices, although i don't believe there have been enough cycles to use that argument, don't think the current "peak" is taking on a very peculiar shape? "Plateau" may be the wrong discription but that would also apply to "peak" in my opnion (no abbreviations!) Is this the future +/-1-10% dips/rises?

And by the way, don't meam to offend but 6 comes after 5 not 3 again!

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.