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This Is What We Are Up Against


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Well, I can wholeheartedly agree with the original posters sentiment, Having been a landlord for yonks, (fair and law abiding I hasten to add) and not BTL, I also hold down a reasonable full time job....from my point of view there are always positives to the way these fools think.

I, yesterday sold one of my houses to a buy to let idiot ( subject to contract of course) now, I believe like many of you the market is there, at the top, ready to reverse....I'm 48, old enough to have seen, been through the last fall out and benefit the other side, like many of you will

Here's an example of a BTLer I work with, he's just, with his brother brought two Buy To Let properties in Gloucester ( hope he's not flooded) I tried to explain to him the positives of being the landlord of that house from 1999, I bought the house for £66,000 and have just sold for £180,000, I'll keep it simplistic and not include tax, also for the time I had it, it was rented out at around 10k a year, good return huh? what I was trying to explain to him was that, I've benefited, if someone was to buy it for 180k now, rent it out for between 800 and 1100, depending on your management options you could possibly make around £150 a month after fees, mortgage and general upkeep, what I was really trying to say is, I'm the one walking off with the loot, the guy who buys it now is buying such a pony investment and if prices fall and rates go higher, my money is in the bank and his is being taken back by the bank, why can't they see it!!!Maybe this will give you a clue to his way of thinking, having had my ex rental house on the market for nearly 4 weeks, I called the agent and asked what's happening, he said plenty of viewing but that bathroom is pony ( you know the green one lol) and you should be prepared to take offers, which I did, I'm not a greedy man, there's no mortgage on it, I took a 10k hit on it, but then maybe it was 10k overpriced lol, anyway, when i explained to my BTLer workmate what the EA had said about the bathroom, he said, well whack a new one in for £500, put £1000 on the price and I bet the prices will have gone up by then as well!!!!!......on that not I walked off.

The clock continues to tick :ph34r:

Reversing inflationary thinking is quite difficult for folk to get their heads around . When I was young in the seventies if you saw a bargain you bought ten of 'em because stuff was always going up. It becomes almost instinctive to snap the 'bargain' because experience has only taught you one way. Reversing that thinking is slow and difficult. My parents still do it on occasion now,they also hold on to stuff that has little value these days because it cost X when they bought it . As Zapata George says 'human nature never changes'

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Great analogy.

I know just how you feel.

Have you considered rolling all those quotes in your sig attribute to Margret Thatcher into one list of quotes attributed once? Then it won't take up an entire screen worth of space. Just a thought.

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Have you considered rolling all those quotes in your sig attribute to Margret Thatcher into one list of quotes attributed once? Then it won't take up an entire screen worth of space. Just a thought.

It's meant to be eye-catching silly.

If it really takes up your whole screen maybe you should get a nice big one like mine. :P

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The old 3 . 5 x salary chestnut again :rolleyes:

it's a LONG TERM relationship, in fact it's an AVERAGE, which is a STATISTICAL MEASURE, just in case you needed clarification. Nothing significant enough has happened to change this long-run trend (hint: population growth is nothing new since about the 11th century so don't try that one, we've always had planning constraints, and post-war house-building was REPLACING pre-existing home; even looser credit is only cyclical, see early 90s for proof of that), and indeed, as part of loosening of credit YOU WOULD EXPECT SPECIFIC AFFORDABILITY TO EASE at the moment, what's special? That's the whle point of interest rate adjustments. It's the new-paradigmers who think that the party will be never ending that make ME wonder... <_<

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This 3.5 x salary. Wasn't that when IR's were well into double figures?

no, as I said, long term, which is not the same as short term . The 1960s also saw low interest rates as we have just experienced. Long term affordability was unaltered.

And wasn't it for a couple?

No it wasn't.

Currently, I'd say the overpriced market is forcing couples to both stay in work to buy. Rentals have not increased commensurately, so interestingly this couple demand thing seems to exist for buying but not for renting, which is still in line with long term salaries. Curious.

Makes the 3.5 rule irrelevant

Price to income ratios have been a reliable and consistent empirical indicator of house prices for several centuries of economic practice. They can and do change according to significant macroeconomic changes, revolution, famine, industrialisation, etc. I hazard that nothing significant enough has happened to change it here nationally, although I believe a long term gradual rise may be in evidence where there is an imbalance in supply, ie the SE, it does not impact on the other 4/5 of the country so is of margnal significance. Ergo, since it has boomed EVERYWHERE, even in places where the is an excess of supply, then any common mechanism cannot be to do with the 'supply/demand' argument, plus of course rentals have not followed either.

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Why should it be a universal law that average house prices always have to revert to 3.5 times average salary?

I've come to terms that it's not going to happen in my lifetime, and I'm dealing with it.

Times have changed. Adapt or else.

Prices will revert to 4.5 to 5 times possibly...

Things will get a little bit better. But don't go chasing rainbows.

Edited by bugged bunny
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This 3.5 x salary. Wasn't that when IR's were well into double figures?

And wasn't it for a couple?

Makes the 3.5 rule irrelevant

I think enword you've just proved my point ! You are a self confessed bull and you think Im talking about lending rules you numpty. Let me explain again in very simple language. If you plot the average house price against the average income you will find that the ratio has fluctuated between something like 3 and until this boom about 5. If you draw a line through the middle of these fluctuations then the mean ratio is 3.5 , it has been higher and it has been lower but it has always to date reverted to a mean of 3.5. The fact that this ratio is somewhere between 7 and 10 now tells you how massiveley overvalued property in the UK has become ( about 50% according to the OECD but of course you knew that !). Or take a look at what property costs in other countries .... in France it seems to be a about a quarter of the prices here. In the US the average house price is approx half of the UK price but is also about twice teh size making them again about a quarter of UK prices on a per square foot basis ( Im not confusing you here am I ?). Thing is enworb I have built a house- I know how much it costs to make one and I can assure you it is a tiny fraction of the price at which they are changing hands now.

Every time there has been a boom and this is about the fourth since the war people ( mainly the VIs) try and convince every one that it is different this time but of course it never is. Wake up - we are being well and truly ripped off - the banks are laughing all the way to the - bwell bank I suppose. The bubble is about to burst - prices have nothing to do with shortages or wealth and everything to do with speculation and non existant lending criteria.

Cant you see enworb you dont even understand this very fundamental relationship or even seem to grasp the basics of economic cycles- a basic bit of research would have told you this and would tell you if now is a good time to buy - but you havent even done that, infact youre not even aware of it - I despair.

Its idiots like you who keep on buying because you have no understanding of value or economic cycles and believe prices will just keep on rising - and the sick thing is because there are so many idiots like you - you are making it true - for now but ultimately prices will revert to the mean and that is a long way down.

Edited by Bearfacts
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Part of the problem is that all the losses of the last crash have been completely made good plus some....i.e. even if one had bought at the peak of the last boom in '88 and held, they would be okay now.......this gives some the reassurance that property will always be okay "in the long run" and even if there is a downturn then so long as they weather the storm all will be good in the end. It's this mindset which has encouraged people to still keep buying investment properties over the last 12 mths.

Trouble is I'm not convinced we will ever see prices this high again (in real terms)......I feel we could be looking at a Japan style crash last many years.

This is possible. I remember looking at a graph that Peter Schiff had produced a few months back. It plotted the average US House Price from the end of the nineteenth century to the start of the twenty first century (probably in real terms).

Somewhere near the start of this graph (early twentieth century) there was a significant fall in house prices that lasted a few years. After this, prices did not get back to their previous peak until early in the twenty first century (about 90 years). True, for ninety years amid the ups and downs, the general trend was up, but the fact is that every now and again there is a big downturn that takes several generations to recover from.

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Why should it be a universal law that average house prices always have to revert to 3.5 times average salary?

It shouldn't be a universal law. It's just one indicator among many. When all the indicators light up the 'doo doo hits the fan'.

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Having a chat with a colleague at work today. He seems reasonably bright, well informed and 'savvy'. We have discussed financial issues before ( mostly stocks and shares ) and he seemed well informed, told me he reads the FT. Anyway conversation turned to property and how he has 'done the house up' and its now worth X million pounds - yawn yawn - yes of course it is. Then he started telling me how he was planning on buying a flat for his 15 year old son. Conversation went something like this:

Me: Do you have any idea what the long term trend ratio of av earnings to av house price is ?

Mate: No

Me: Its 3.5, what do you think the current ratio is ?

Mate: 5'ish.

Me: No, nationally its between 7 and 10 depending on whose data you look at and locally its over 9.

Mate: Oh - followed by bemused silence.

Me: Do you realise that for the price of a crappy studio flat here you could buy a 6 bedroom detatched house in parts of France.

Mate: Yeah but I dont want to live in France do I.

Me: No, but I'm just trying to point out how laughably over- priced UK property has become.

Mate: Silence

ME: Do you know how many times the market has crashed in real terms since the war ?

Mate: Once and that was because interest rates hit 15% !!

Me: No, its at least three times so far.

Mate: Yeah but in the long term ......... yadaa yadda yadda

Me: Got to go .......

The point is this man is willing to borrow a couple of hundred thousand to buy a flat for his 15 yesar old son but knows nothing about the property market except, presumably, what his mates tell him and what he sees on T.V. I think there are many more like him too.

I come across the same thing in the pub and at work, they see the headline news and thats the only thing that matters,

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Its idiots like you who keep on buying because you have no understanding of value or economic cycles and believe prices will just keep on rising - and the sick thing is because there are so many idiots like you - you are making it true - for now but ultimately prices will revert to the mean and that is a long way down.

I can't be bothered to read all of your post considering you insulted me.

I'm like most of Joe public. Moving with the times....forgetting the (supposed) 3.5 rule and now i'm not in a position where I don't need a crash.

And you call me an idiot :lol:

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I can't be bothered to read all of your post considering you insulted me.

I'm like most of Joe public. Moving with the times....forgetting the (supposed) 3.5 rule and now i'm not in a position where I don't need a crash.

And you call me an idiot :lol:

It will be lending institutions who "remember" previous lending multiples, not Joe Schmuck.

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Guest Skint Academic
And you call me an idiot :lol:

Personally I would call you a good example of a bottom-up process that results in the emergent phenomena that we refer to as mass psychology (herd mentality, cognitive dissonance, selective focus, emotional bias over 'rational' cognition etc).

Fascinating stuff.

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Why should it be a universal law that average house prices always have to revert to 3.5 times average salary?

I've come to terms that it's not going to happen in my lifetime, and I'm dealing with it.

Times have changed. Adapt or else.

Prices will revert to 4.5 to 5 times possibly...

Things will get a little bit better. But don't go chasing rainbows.

You reject empiricism far too readily, it's a relationship that's older than you or I and just you saying 'well it doesn't look like that from here' isn't really enough to overturn history and hard statistics in my book, but fair enough as you seem a genuine person, and there is some credence to your argument:

If you think a significant enough change has occurred then, sure, this is possible. No such thing has happened nationally, except perhaps demographics which may indeed take a generation to sort itself out. Maybe something additionally has happened specifically to the Bristol area where your profile says you live? Historically the SE had slightly higher price to incomes - closer to 4 in the SE and closer to 3 in the North, maybe Bristol is now part of the SE owing to the M4, whose lengthways economic development, especially re: the tech boom, etc, has surely been most massive in the last 15 years?

I see where I live, Leeds, and I do not see significant economic changes to support the rises and thus have little difficulty imagining falls in here, additionally there is no housing shortage up here. We also have the prospect of a public sector shrinkage, significant in a city where every other person seems to have a cushdie public sector job. Indeed, the most absurdly overpriced areas, supported by BTLrs from out of town, are already falling, noticeably but not at crash speed. I have little difficulty imaging 3.5x multiplier or less. This is reflected in low cost rentals.

Yourself, living in Bristol, you may see the increasing influence of wealth of the M4 corridor. Perhaps this is a house-price paradigm-shifting phenomenon for your local market.

In having sat it out at very low rent whilst prices have stagnated about £10,000 over the past 3 years around me, I would say I HAVE adapted very well indeed. But I accept that I see a different local market to your good self.

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Remember Japan in the 1990's.

Would people really care if their house dropped 80% in value if their base rate tracker mortgage was tracking a base rate of 0% and they were living in their homes for free?

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This is possible. I remember looking at a graph that Peter Schiff had produced a few months back. It plotted the average US House Price from the end of the nineteenth century to the start of the twenty first century (probably in real terms).

Somewhere near the start of this graph (early twentieth century) there was a significant fall in house prices that lasted a few years. After this, prices did not get back to their previous peak until early in the twenty first century (about 90 years). True, for ninety years amid the ups and downs, the general trend was up, but the fact is that every now and again there is a big downturn that takes several generations to recover from.

the corollary is that house prices might well revert to mean from the current high point over a very long time, maybe decades and decades, presumably with slow inflationary real-terms losses. Thus no crash, but the 3,5x rule still correct, but essentially of no use to current house-buying generations. I find that hard to believe looking at the debt and btl situation surrounding property, but it's plausible, I feel.

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Would people really care if their house dropped 80% in value if their base rate tracker mortgage was tracking a base rate of 0% and they were living in their homes for free?

so are you saying that low interest rates mean that capital losses don't hurt? what?

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Would people really care if their house dropped 80% in value if their base rate tracker mortgage was tracking a base rate of 0% and they were living in their homes for free?

Internal, that is to say retail lending bank rates within Japan never actually reached 0%. About the lowest they reached was 2%, with floating rate mortgages more typically priced at base +2.5%.

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I think enword you've just proved my point ! You are a self confessed bull and you think Im talking about lending rules you numpty. Let me explain again in very simple language. If you plot the average house price against the average income you will find that the ratio has fluctuated between something like 3 and until this boom about 5. If you draw a line through the middle of these fluctuations then the mean ratio is 3.5 , it has been higher and it has been lower but it has always to date reverted to a mean of 3.5. The fact that this ratio is somewhere between 7 and 10 now tells you how massiveley overvalued property in the UK has become ( about 50% according to the OECD but of course you knew that !). Or take a look at what property costs in other countries .... in France it seems to be a about a quarter of the prices here. In the US the average house price is approx half of the UK price but is also about twice teh size making them again about a quarter of UK prices on a per square foot basis ( Im not confusing you here am I ?). Thing is enworb I have built a house- I know how much it costs to make one and I can assure you it is a tiny fraction of the price at which they are changing hands now.

Every time there has been a boom and this is about the fourth since the war people ( mainly the VIs) try and convince every one that it is different this time but of course it never is. Wake up - we are being well and truly ripped off - the banks are laughing all the way to the - bwell bank I suppose. The bubble is about to burst - prices have nothing to do with shortages or wealth and everything to do with speculation and non existant lending criteria.

Cant you see enworb you dont even understand this very fundamental relationship or even seem to grasp the basics of economic cycles- a basic bit of research would have told you this and would tell you if now is a good time to buy - but you havent even done that, infact youre not even aware of it - I despair.

Its idiots like you who keep on buying because you have no understanding of value or economic cycles and believe prices will just keep on rising - and the sick thing is because there are so many idiots like you - you are making it true - for now but ultimately prices will revert to the mean and that is a long way down.

Spot on Bearfacts!

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Bulls & VI's who claim that 'it's different this time' argue that the current level of HPI is sustainable because of increased demand and a shortage of supply.

Of course, supply and demand is the reason for all price changes in a market economy. What we see and what the bulls & VI's don't is that the very high level of demand over the last few years has been driven not by true needs but by speculative mass hysteria, pure greed, and fear of losing out.

It is a classic bubble, caused by demand rising out of all proportion to its historical levels simply because of the mass belief that the good times will go on for ever. With supply at a fairly constant level, of course prices soar.

The tipping point comes when confidence evaporates. This is not specifically related to interest rates, levels of house building, or any other rational, objective criterion that pundits trot out on either side of the argument. It has to do with mass psychology and the herd mentality. The crash comes not when prices fall but when the majority of people believe that they are going to fall.

This of course, makes the top of the market almost impossible to call. The only certain thing is that this bubble will burst, one day, and that the price/earnings relationship will return to near its long-term mean as Bearfacts eloquently outlined.

The longer the bubble keeps going, the greater the crash will be.

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Would people really care if their house dropped 80% in value if their base rate tracker mortgage was tracking a base rate of 0% and they were living in their homes for free?

This is one of the silliest pieces of muppetry I've seen on here.

Firstly, zero official rates does not mean zero mortgage rates. Mortgage rates reflect market interest rates NOT the base rate. For instance, when base rates were 1% in the Evil Empire, were mortgage rates 1 or 2%? Absolutely not! They were in the region of 4%.

Secondly, you think people wouldn't care? You're an idiot. Of course they would care, it would profoundly affect peoples feelings of wealth and therefore spending patterns. Building would cease, there would be MASSIVE unemployment.

Thirdly, mobility would be severely compromised. Most folks would be trapped in such serious negative equity that they would never be able to sell and move until equity was positive. More massive unemployment in the real estate industry.

I've seen some silly things from some of the bears here, but this one takes the cake.

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I can't be bothered to read all of your post considering you insulted me.

I'm like most of Joe public. Moving with the times....forgetting the (supposed) 3.5 rule and now i'm not in a position where I don't need a crash.

And you call me an idiot :lol:

Enworb - I apologise for insulting you - that wasnt really fair but do you not see my point ? You are a property bull along with 'Joe Public' as you label them because you havent the slightest grasp about market or economic fundamentals. You and Joe Public have been suckered into this game by all the vested interests and often by your own greed - and, I am sorry to say this, but they are playing on your ignorance ( I dont mean general ignorance - afterall I dont know you but certainly you seem ignorant about the property market ).

I feel very passionately about this for two good reasons 1. I have put off buying a place for my family for three years now simply because I can see the market is so hideously overvalued and I am not prepared to risk loosing hundreds of thousands of pounds when the market corrects. I strongly resent the fact that buying a home ( a neccesity) has always been such a massive gamble in this country. 2. I have young children and I hope that one day they will be in a position to buy a place of their own at a reasonable price but that likelihood is receding as the market is driven to ever more absurd highs but the stupid and the just plain greedy for whom owning a portfolio of properties is seen as an effort free way of attaining great wealth. My childrens future is being controlled by the gullible and the greedy - who , in effect are forcing them to work ever harder and longer just to support their dreams of effort free luxury.

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