Will New Builds create a crash?

[Who Knows]

What impact do people think the influx of new-build so called luxury apartments will have on aggravating any potential crash. There seems to be thousands of these in the most unlikely parts of the country, many lying half empty or half built. When combined with BTL over-priced 2 bed rabbit hutches that will be ditched as soon as interest rates return to average UK levels the situation looks set for disaster. The market will be flooded with pretentious, out of date apartments and ugly concrete boxes crammed into stupidly small plots that no one will choose to buy when there is no longer a rush to put your cash down before your brain has a chance to think about the garbage on offer.

[wannabe FTB]

In T.Wells there are two new build blocks down my road which are nearly finished, one just completed in the town centre and two more just being started. I'm dying to see what happens when they are all finished!

In the block just completed theres a two bed flat to rent for £1250, its not that big and its right in the centre of town, from your window you will be able to see the skaters hanging out in their spot by the clock and no matter what time of day I walk past theres always people drinking.

[van hoogstraten]

Here in Melbourne this is a particular problem which distorts the market – the price falls for apartments are way in excess of those for houses but are part of the overall average property price – these have been the first to drop – why buy a shoebox when you can get a detached house a little further out for the same price. Investors have been trying to bail out of off the plan purchases as prices fall using whatever methods they can

http://www.theage.com.au/articles/2004/08/...s&oneclick=true

[Time to raise the rents.]

I wouldn't add too much importance to it. If a slowdown turns into a crash, builders will concentrate on other things & new builds will stop. Obviously the completed one's will need to be sold though.

STR's will be able to afford to buy the cheapies while the rest of the market waits.

[OnlyMe]

TTRTR,

<i>builders will concentrate on other things & new builds will stop. </i>

Err, like what? Will they be starting their own hedge funds, opening chains of hair salons?

I know BKL have announced a sideways shift into "urban regeneration", but it is tantamount to the same thing, except in a different market niche (as well as returning cash to investors).

The market does not like shrinking companies, if anything the builders will increase volume in an attempt to maintain turnover, either that or they will have to make significant cuts in their fixed cost base to compensate, get rid of perks etc etc.

[Time to raise the rents.]

Actually it's called sacking your workforce & turning your attention to other projects. Builders are much more flexible than you think. Their workforce consists largely of sub-contractors and can turn their attention to any project. Projects on offer? Gordon B announces 5 new hospitals etc etc (Don't look it up, I made it up). The govt often initiates new projects in tough periods. Bridges, roadworks, anything.

Do you seriously think that a builder would risk millions of pounds pumping out newly built flats/houses to a market that doesn't want them?

Most builders can't even get the finance to build an apartment block without a large number of advance sales.

I think you need to brush up on your knowledge before you question this one.

Pumping out unwanted buildings could be compared to building massive Yo-yo's for a market that doesn't want them. Fun to build, but no fun to play with.

[Gavin]

I personally think this is rather amusing.

The bulls, and I mean the real bulls who kept justifying the boom, (not TTRTR and BBB, that keep winking and suggesting that there are personal circumstances that we don't know or understand mean they are exempt from a crash), the real bulls, who remained and remain adamant that its a shortage of property thats the problem may actually accentuate their own downfall, because if it was simply an imbalance in the market caused by sentiment, an imbalance that needs a correction instead of a fundamental shortage new paradigm it will correct without assistance given time, but with assistance it will overcorrect.

I certainly am not seeing old houses falling over that need urgent replacement and with prices as they are people are looking to live together with others not separate. So surely these thousands upon thousands of flats are increasing supply?

We have all seen them.

Now Prescott has further plans to build many more homes in the South East, the building of which will overlap with at best a stagnation (soft landing) and at worst with a sharp decline in prices.

"The perfect storm".

Its like noticing that a fire has started and to put it out you throw a bucket of water, only to find the bucket was full of petrol.

I can see that in 2010 Prescott will have the opposite problem, with people complaining about their low pension asset values. The push will be on to increase demand, and advice will be given about how to have s e x with your wife to create babies. There will be soft porn on the BBC as part of the political broadcasts.

Sound crazy? No more than the amount of luxury flats being built.

[OnlyMe]

TTRTR,

Generally the housebuilding companies are not civil construction companies, neither are they geared up to do the work - they don't have the skills necessary within the company to perform those tasks, neither are they easily available cheaply in the market place and neither do they have a track record in say big PFI construction work.

If they sacked their staff / contract workers and just invested the money their turnover would be decimated, gone would be the 30/50% mark up on housing and it would be hello 5%. The market would crucify such a move.

Also many are sitting on large land banks, some wil be old and cheap, a lot won't. In a falling market these land banks are likely to depreciate, better to build and extract the value - or maybe sell off the part of the land bank. I think we may be seeing a little off this now. Wait and see what the build rates are like for this year in comparison with recent years.

[Time to raise the rents.]

Builders are very flexible and will build for whoever their customer is and whatever their requirements. + a lot of their large equipment is hired from specialists and is therefore available on demand for almost any type of project.

I'm not saying house builders will become bridge builders, I'm saying their staff will move to where the work is and to whatever company is offering the work.

Land banks are generally held over until the market conditions are right. They form a part of the tangible value of the company in tough times. Why risk building when there's no demand.

If they sacked their staff / contract workers and just invested the money their turnover would be decimated, gone would be the 30/50% mark up on housing and it would be hello 5%. The market would crucify such a move.

Their share prices are down already, any clues?

[OnlyMe]

TTRTR,

I'm not saying that the employees won't be able to transfer and be put on govt funded jobs. I'm saying that the house builders (if the directors want to keep their fat salaries, expanding pensions, and the value of their share holdings up) will have to do whatever is necessary to keep turnover and profit as high as possible, if they don't and duck out the stock market will just value them on the cash in the bank and that's it and the market will also factor in the cost of carrying the remaining staff, running expenses etc etc. Most (if not all of the major housbuilders are listed on the stock exchange) and the investors play a large part in company psychology - it's grow or die, and I don't see many voting for the die option.

As for land banks, well their value is related to whatever the current market valuations dictate, if they are going to just sit on them they run real risks of losing serious amounts of money if the market moves away from them, much better to churn.

[Time to raise the rents.]

If I was you then I'd get some housebuilder's shares cheaply while you can. It's obviously clear that they'll be able to maintain turnover and profitability despite the market not buying.

Or another take on it:

Directors will have to keep losses as low as possible for the company to survive.....

[Nathan]

The market will always buy though. Lets say a contractor builds a block of 20 flats that cost him £50,000 each to build (including the land costs etc/20). In todays market they'll lease it to an estate agent/sell them themselves etc for (say) at least £70,000. Fair enough. In todays market the might 'sell' them on for £150,000 each (random figures here of course). Now, when there is a crash and the prices drop sufficiently the contractor will still be able to fetch the £70,000 they were at least after.

For this reason there'll always be new projects to build etc, thats why contractors will always find work. (its true they wont switch from housing to building etc) but there are always re-furb jobs and new builds all the time. Unless there is a recession, which of course affects everyone not just them.

Ultimately ehat i'm saying is, 'the market ALWAYS buys' though whether they're prepared to pay superinflated prices for it is another matter.

My rant

cheers

nathan

(PS couldn't resist posting)

[BBB]

GAVIN

''not TTRTR and BBB, that keep winking and suggesting that there are personal circumstances that we don't know or understand mean they are exempt from a crash''

I dont think either of us have said we're exempt from a crash, if it comes, we've merely said we'll get through to the otherside , with our portfolio's intact and our incomes still pumping.a crash would only ever represent a problem if we HAD to sell .you seemed to understand where i was coming from yesterday, did you not?

regards BBB.

[statscat]

Its an interesting point raise though abut "new builds". However I am not

IN this area new builds are more expensive than existing properties and within 2 miles of my home there are 4 new build sites under construction and 2 recently finished.

Most of the flats have been sold for "rented accomodation" and sadly remain empty, however the houses are shall we say a little on the expensive side, so much so that I am yet to be convinced that there are people with sufficient equity / wage to purchase them. (at five times earnings you need to be at least 130k), these houses have virtually no garden and you can touch your neighbors house from your bathroom window and there are 15 of them. There are several "unique" properties close by that are larger s houses with much more spacious gardens, so what does it make them worth ?

My concern is that new builds further add to the upside of the market and that to remain competitive they will need to aler prices (or go with houses unsold) this could create downwards pressure in areas with lots of new builds.

Builders will get by as TTRTR points out but given that some of these new builds don't yet have show houses then they could be "in the right place at the wrong time".

[Bubble Pricker]

Here is, what happened in Germany over the past 10-15 years. I am not saying this is something that will happen here in the same way, as things are different in many ways in Germany.

In the 80s and early 90s, there was a real shortage of property in Germany (not the fantasy shortage imagined here), especially in urban areas. This had been caused by onerous landlord and tenant laws (which incidentially still exist today). Basically no-one wanted to invest in new housing stock. The shortage had become so bad that rents had to be regulated, otherwise the market would have driven rents into the stratosphere. (Again this just shows that there is no shortage of property here, because rents are not rising). Of course, this did not solve the problem, because whilst rents were kept artificially affordable through regulation, you had, literally, 200 people queing up to view a property.

I myself went to such viewings. You had to essentially wait outside the newspaper factory at 4am in morning for the first copies of the paper to come hot off the press, then browse through the ads, start ringing up the landlord by 6 or 7am. By 8am, they would usually have taken the phone off the hook. The viewing would take place the same morning with about 100 other would-be tenants. Because the landlord could not rent to the highest bidder, because of rent regulation, viewing were tentamount to beauty parades. The veiwing was not about prospective tenants viewing the property. People would usually glance around for a minute and then say they were very interested. The point was that they would rent anything, if they just could get something. The viewing was essentially about landlords viewing prospective tenants. At the end of the viewing, you would enter your name to a long list of applicants, only to never hear from the landlord again.

The government decided to react to this problem not by removing the rental regulation and the onerous landlord and tenant laws, which would have been the neo-liberal way to do it, but by introducing tax incentives on investing in residential property. This caused a rash of property development, mostly in blocks of modern flats. Because of the rush to invest in these schemes, prices predictably rocketed. At one point, enough new flats had been built to alleviate the shortage, but of course, as these things go, the building carried on, because late-coming investors were still being sucked in by commission hungry estage agents and mortgage brokers and bank managers who arranged the finance. So now there is an oversupply of flats in Germany, and prices have steadily declined over the past 10 years. The prices paid for flats at the height of the building boom have not been seen again in nominal terms and will probably never be seen again in real terms. Detached and semi detached houses have remained much more stable in the same period.

[Gavin]

BBB, couldn't resist it.

[BBB]

BBB, couldn't resist it.

Fair do's GAVIN, i would have done the same.

[Time to raise the rents.]

I hate when govts tweak things. They often don't know what the hell the result will be and tweak it anyway.

The veiwing was not about prospective tenants viewing the property. People would usually glance around for a minute and then say they were very interested. The point was that they would rent anything, if they just could get something. The viewing was essentially about landlords viewing prospective tenants. At the end of the viewing, you would enter your name to a long list of applicants, only to never hear from the landlord again.

That sounds like it was when I first arrived in London in 92. Except you could bid the price higher.

Aren't you guys happy with the current system?

Here in Sweden people spend up to 10 years on waiting lists for the flat's that they want. And very few new builds for renting are going up.

[Bubble Pricker]

By the way, since talk has been about lawsuits and all that, some of the investors who were caught out badly in Germany sued banks/mortgage brokers/surveyors etc. essentially claiming that the purchase prices had been inflated and the promised rental returns exaggerated. I have not followed this issue in detail, but I think I read recently that some of the lawsuits had been lost, the court essentially telling people, "tough luck, you should have done your own research".

That said, each case probably stands on its own merit, but I guess if someone received bad advice from a "financial advisor", who, with Euro signs in his eyes (commission), urges his client to invest in an overpriced residential property scheme, there might at least be a chance of a case.

[Time to raise the rents.]

Exactly the reason a successful investor is a hands-on investor.

If you can't tell whether the brochure lies or not, keep researching until you can tell.

[Dilemma]

I'm still renting in my new build apartment block and it is still empty. All those mortage payments going out every month and no tenants. Great BTL investments?

My friend who is in a similar development elsewhere, says that the houses that were up for £300k two months ago are now priced at £200k and the flats which were priced at £150k are now priced at £120k. Needless to say still no interest.

Many people have made the point that a soft landing isn't possible. The whole momentum of this bubble has been caused by people scrambling to buy property, certain of capital gains. The minute this sentiment changes and people believe that prices have stopped going up, then the whole pack of cards collapses. Demand plummets, supply catches up as the many new build and conversion projects are completed and prices fall.

The only question is how far will they fall and for how long. If the government can delay the falls until after the next election (May 2005) then they will have done well but they will just be delaying the inevitable and the next government will oversee the noughties property crash.

My guess is that there will be small falls every month until then and at the election, the government will claim that the market will soon recover, house prices are still much higher than they were a few years ago etc etc. Then the crash will come.

[Time to raise the rents.]

Great post Dilemma,

So prices are down 33% then?

Where can one check your friends statements?

[Dilemma]

Nope not saying thats a crash or that they even represent falls. Falls in asking prices = a fall in sentiment.

Do you doubt my friend's statements? A comparison of the property pages from two months ago and now would prove it. I saw the houses myself up for £300k. The whole area is deserted. There are so many "For Sale" signs it looks like there's smallpox in the water.

[Time to raise the rents.]

I'm not here to challenge what you say your friend says, I just want to point out that it's not backed up by anything.

[Dilemma]

Its backed up by hard evidence in the form of newspaper property pages. If you want to go to the trouble to check this then feel free but mine isn't the only tale of plummeting sentiment and asking prices. The houses have been empty for six months on BTL mortgages I shouldn't wonder. It seems to me that the seller might be getting desperate after months of 'dead money' going into the mortage with no tenants.