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Why The Property Market Is Heading For A Nasty Fall

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Why the property market is heading for a nasty fall

By John Stepek

August 15 2007

There’s no doubt that the housing market is starting to look a little peaky

The latest report from the Royal Institution of Chartered Surveyors (Rics) found that the number of people looking for a home fell at the fastest rate in three years last month, while the number of unsold properties rose to its highest this year. Surveyor confidence on future sales also turned negative for the first time since way back in March 2003.

The Rics survey was one of the first to show evidence of a slowdown during the last big tremor in the housing market that kicked off in mid-2004 - which was also accompanied by rising interest rates, just as we’re seeing just now.

The Rics survey isn’t the only evidence of problems in the property market.

Repossessions are also surging – data from the Council of Mortgage Lenders (CML) shows that they hit an eight-year high in the first half of 2007, and are still climbing

However, plenty of pundits are still arguing that prices in the UK won’t fall. At worst we’ll see a soft landing. Not for us the housing carnage seen in America.

They’re wrong. There are several reasons why.

* What next for interest rates? Our experts give their predictions

Salaries vs property prices

Firstly, the housing market is growing ever more unaffordable. First-time buyers are now shelling out 3.37 times their salary on average to buy a house, says the CML, the highest ever. Meanwhile, the proportion of their income going on mortgage payments has jumped to 19.3%, the highest level since 1991 – around about the time of the last property crash.

These figures are almost certainly understated too. The average house price (according to Nationwide) is nearly £185,000. Yet the average salary is – optimistically – in the region of £30,000, and far less if you take London out of the equation. So the average house costs six times the average income. It’s little wonder that the proportion of first-time buyers entering the market has fallen sharply.

The slack, of course, is being taken up by buy-to-letters. Nearly one in six mortgages taken out in the first half of this year was a buy-to-let loan. The sector now accounts for 10% of the mortgage market, from just 3% five years ago.

But none of this is sustainable. That’s because the housing market is propped up on cheap debt – and debt is becoming steadily more expensive, due to rising interest rates.

The trouble with buy-to-let is that it only makes sense if your costs are lower than your outgoings. It also only makes sense if you can earn more by investing in buy-to-let than if you put your money in a bank account – after all, it’s riskier and more hassle.

But, according to Landlord Mortgages, the average rental yield on a buy-to-let property is 5.42%. That compares to the more than 6% interest rate that you can get on some savings accounts.

And, in many areas, there’s more and more anecdotal evidence that landlords – particularly those who have bought in over-built city centre apartment blocks – are actually subsidising their tenants’ rent every month. In other words, they are earning less in rent than they have to pay out in mortgage costs.

The higher cost of living

This situation will only get worse. Interest rates having risen sharply in the past year or so, which means that anyone who took out a two- or three-year fixed-rate mortgage in 2004 or 2005 is looking at paying a lot more when their deal comes to an end. The CML reckons that, in the next 18 months, around two million borrowers will see such deals expire.

This comes at a time when consumers are already struggling. Just this week, US retail giant Wal-Mart (which owns Asda over here) issued a profits warning, and said that consumers all over the world were battling rising interest rates and high petrol prices.

“It’s no secret that many customers are running out of money towards the end of the month,” said chief executive Lee Scott. “The pay cheque cycle is, in fact, more pronounced now than it ever has been.”

If you’re still sceptical about the idea that house prices in the UK can ever fall, just take a look across the Irish Sea. House prices in Ireland fell for the fourth month in a row in June, and were down 2.6% on an annual basis during the first half of the year. The falls are down to rising eurozone interest rates cutting into the amount that Irish homebuyers can borrow.

Property chickens come home to roost?

And, on top of higher interest rates, the recent turmoil in the credit markets and the lessons of the US sub-prime market are likely to make it harder for lenders to offer the same kind of deals as they have in the past five years.

As Melanie Bien of independent mortgage broker Savills Private Finance recently told The Telegraph: “Problems in the wholesale lending market filter through to borrowers in the mainstream mortgage market in the form of tighter lending criteria or higher rates of interest.”

So a credit crunch – as seems to be happening right now - would tighten up lending standards across the world, not just in the US. And for a property market that’s been propped up by six-times salary mortgages, 125% mortgages, and other exotic forms of lending, that’s bad news.

Recently, credit rating Fitch put the UK economy as being one of the three most vulnerable housing markets to interest rate hikes. It reckoned that UK housing was 20% overvalued.

I think even that might be optimistic.

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Why the property market is heading for a nasty fall

By John Stepek

August 15 2007

There’s no doubt that the housing market is starting to look a little peaky

The latest report from the Royal Institution of Chartered Surveyors (Rics) found that the number of people looking for a home fell at the fastest rate in three years last month, while the number of unsold properties rose to its highest this year. Surveyor confidence on future sales also turned negative for the first time since way back in March 2003.

The Rics survey was one of the first to show evidence of a slowdown during the last big tremor in the housing market that kicked off in mid-2004 - which was also accompanied by rising interest rates, just as we’re seeing just now.

The Rics survey isn’t the only evidence of problems in the property market.

Repossessions are also surging – data from the Council of Mortgage Lenders (CML) shows that they hit an eight-year high in the first half of 2007, and are still climbing

However, plenty of pundits are still arguing that prices in the UK won’t fall. At worst we’ll see a soft landing. Not for us the housing carnage seen in America.

They’re wrong. There are several reasons why.

* What next for interest rates? Our experts give their predictions

Salaries vs property prices

Firstly, the housing market is growing ever more unaffordable. First-time buyers are now shelling out 3.37 times their salary on average to buy a house, says the CML, the highest ever. Meanwhile, the proportion of their income going on mortgage payments has jumped to 19.3%, the highest level since 1991 – around about the time of the last property crash.

These figures are almost certainly understated too. The average house price (according to Nationwide) is nearly £185,000. Yet the average salary is – optimistically – in the region of £30,000, and far less if you take London out of the equation. So the average house costs six times the average income. It’s little wonder that the proportion of first-time buyers entering the market has fallen sharply.

The slack, of course, is being taken up by buy-to-letters. Nearly one in six mortgages taken out in the first half of this year was a buy-to-let loan. The sector now accounts for 10% of the mortgage market, from just 3% five years ago.

But none of this is sustainable. That’s because the housing market is propped up on cheap debt – and debt is becoming steadily more expensive, due to rising interest rates.

The trouble with buy-to-let is that it only makes sense if your costs are lower than your outgoings. It also only makes sense if you can earn more by investing in buy-to-let than if you put your money in a bank account – after all, it’s riskier and more hassle.

But, according to Landlord Mortgages, the average rental yield on a buy-to-let property is 5.42%. That compares to the more than 6% interest rate that you can get on some savings accounts.

And, in many areas, there’s more and more anecdotal evidence that landlords – particularly those who have bought in over-built city centre apartment blocks – are actually subsidising their tenants’ rent every month. In other words, they are earning less in rent than they have to pay out in mortgage costs.

The higher cost of living

This situation will only get worse. Interest rates having risen sharply in the past year or so, which means that anyone who took out a two- or three-year fixed-rate mortgage in 2004 or 2005 is looking at paying a lot more when their deal comes to an end. The CML reckons that, in the next 18 months, around two million borrowers will see such deals expire.

This comes at a time when consumers are already struggling. Just this week, US retail giant Wal-Mart (which owns Asda over here) issued a profits warning, and said that consumers all over the world were battling rising interest rates and high petrol prices.

“It’s no secret that many customers are running out of money towards the end of the month,” said chief executive Lee Scott. “The pay cheque cycle is, in fact, more pronounced now than it ever has been.”

If you’re still sceptical about the idea that house prices in the UK can ever fall, just take a look across the Irish Sea. House prices in Ireland fell for the fourth month in a row in June, and were down 2.6% on an annual basis during the first half of the year. The falls are down to rising eurozone interest rates cutting into the amount that Irish homebuyers can borrow.

Property chickens come home to roost?

And, on top of higher interest rates, the recent turmoil in the credit markets and the lessons of the US sub-prime market are likely to make it harder for lenders to offer the same kind of deals as they have in the past five years.

As Melanie Bien of independent mortgage broker Savills Private Finance recently told The Telegraph: “Problems in the wholesale lending market filter through to borrowers in the mainstream mortgage market in the form of tighter lending criteria or higher rates of interest.”

So a credit crunch – as seems to be happening right now - would tighten up lending standards across the world, not just in the US. And for a property market that’s been propped up by six-times salary mortgages, 125% mortgages, and other exotic forms of lending, that’s bad news.

Recently, credit rating Fitch put the UK economy as being one of the three most vulnerable housing markets to interest rate hikes. It reckoned that UK housing was 20% overvalued.

I think even that might be optimistic.

Good find - and all spot on, IMHO, particularly the credit crunch bit.

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Whilst this may make for good bear food, some is from the RICS. Whilst they have given positive news about the housing market, people on here have been widely discrediting them and classing them as VI's. Now that they appear to be bearish, why is it that people start believing them. We could really do with making our minds up as to which group are VI's and bound to tell lies to perpetuate HPI, and which give good honest facts and figures.

Minds cannot be changed simply on the grounds of whether people like and agree with what they are saying at a given moment in time!!

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Sounds like they have been reading HPC.co and taken the best bits to put in their farticle.

Its all so blindingly obvious really. The only question is when is it going to trigger into a nationwide crash? So far, we only have 50% of the regions reporting falls to the downside (Latest LR INdex). I have a feeling that the "Indexes" are all rigged to cover up what is really going on in the market--after all Gordon's future relies on the boom side of the boom-bust equation continuing.

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Minds cannot be changed simply on the grounds of whether people like and agree with what they are saying at a given moment in time!!

I say unto you, that likewise joy shall be in heaven over one sinner that repenteth, more than over ninety and nine just persons, which need no repentance.

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Whilst this may make for good bear food, some is from the RICS. Whilst they have given positive news about the housing market, people on here have been widely discrediting them and classing them as VI's. Now that they appear to be bearish, why is it that people start believing them. We could really do with making our minds up as to which group are VI's and bound to tell lies to perpetuate HPI, and which give good honest facts and figures.

Minds cannot be changed simply on the grounds of whether people like and agree with what they are saying at a given moment in time!!

RICS know their credibility is on the line. They fought the bad fight, lost and now have to admit the truth. After all, they know what happened to their oppositite number in the US, David "Mr. Realestate" Lerah who was still calling a soft landing as the market crashed all around him. Discredited, mocked, pilloried and no longer working as a Realtor.

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RICS know their credibility is on the line. They fought the bad fight, lost and now have to admit the truth. After all, they know what happened to their oppositite number in the US, David "Mr. Realestate" Lerah who was still calling a soft landing as the market crashed all around him. Discredited, mocked, pilloried and no longer working as a Realtor.

So they lied right up to the point that their views alligned with yours! Strange that - other reason could be that human nature means people look for views that confirm theirs. Could this be happening now - bears have waited so long for people to agree with them that once a professional body shares the same view, they grab at it with desperation to prove they were right all along (or have been wrong for the last three years and are now starting to look correct!)

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Guest Popalot
Whilst this may make for good bear food, some is from the RICS. Whilst they have given positive news about the housing market, people on here have been widely discrediting them and classing them as VI's. Now that they appear to be bearish, why is it that people start believing them. We could really do with making our minds up as to which group are VI's and bound to tell lies to perpetuate HPI, and which give good honest facts and figures.

Minds cannot be changed simply on the grounds of whether people like and agree with what they are saying at a given moment in time!!

What you are failing to account for is the concept that th RICS are only know becoming honest about what has been evident, but denied by VIs for a long time. This is not about u changing our minds, it is about them........Think about it. ;)

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So they lied right up to the point that their views alligned with yours! Strange that - other reason could be that human nature means people look for views that confirm theirs. Could this be happening now - bears have waited so long for people to agree with them that once a professional body shares the same view, they grab at it with desperation to prove they were right all along (or have been wrong for the last three years and are now starting to look correct!)

It is hard for EAs to admit the truth and they will only do so when it becomes so obvious to such a large number of people that it is no point in covering it up any longer. The rot set in by 2005 and had it not been for Gordon's IR cut we would have been where we are today a little sooner--perhaps 6 months after the US market began to crack.

BTW, shouldn't you have said:

WE
have waited so long for people to agree with
US
that once a professional body shares the same view,
WE
grab at it with desperation to prove
WE
were right all along (or have been wrong for the last three years and are now starting to look correct!

Methinks you might be a stealth bull? Or worse, a Neither in disguise? :o:o

Edited by Realistbear

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I’d say that one of the most useful leading indicators published by RICS is their sales-to-stock ratio – this works in the same way and the BoE mortgage approval figures for house purchase in that it correlates closely with HPI. The transaction proxies, if you know how to read them, effectively tell you the current level of HPI about six months before the official YoY is released – at the moment it’s around 9% annualised, post peak, and trending down.

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Methinks you might be a stealth bull? Or worse, a Neither in disguise? :o:o

Not a bull or a neither in disguise I'm afraid. I think that the fundamentals of the property market are such that prices are overvalued and due for a fall. I personally do not see this as a good thing though for the majority of people, whether homeowners or not. With a HPC the economy would be in tatters and this can surely benefit no-one. A large number on here wish for the economy to be in ruins, loads of people bankrupted, large amounts of unemployment etc just so that if they cling on to their job through a recession they may be able to buy a house. Lets not forget that the majority of these people have been complaining about how selfish BTL's are now they are simply hoping for the majority of the country to be in financial turmoil so they can acquire a house - so who is more selfish then?!

I am bearish is my view for the property market in the short term, but my reasons for being so are based on fundamentals of the market - not in a desire to see a large number of people ruined for my economic benefit.

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nick22abdn Posted Today, 02:03 PM

Lets not forget that the majority of these people have been complaining about how selfish BTL's are now they are simply hoping for the majority of the country to be in financial turmoil so they can acquire a house - so who is more selfish then?!

I think you clearly misunderstand people and the situation.

BTL's are making the market.

People on HPC are reading it, incorrectly at times, but we are not and have not created this mess. If we are in a position to benefit from it through prudence and abstinence then SO WHAT?

Oh and it helps to have good grammar yourself when correcting others!

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I think you clearly misunderstand people and the situation.

BTL's are making the market.

People on HPC are reading it, incorrectly at times, but we are not and have not created this mess. If we are in a position to benefit from it through prudence and abstinence then SO WHAT?

Oh and it helps to have good grammar yourself when correcting others!

I wasn't saying that those who have been prudent shouldn't or wont benefit from a drop in the market. I was pointing out the hypocrisy of those hoping for a crash which would bring financial ruin to many hardworking families (not just BTL's) just so they can benefit.

I corrected fundamental misuse of English gramar. It really irritates me when people use 'of' the entire time instead of 'have'. It is so basic it is taught to 5 year olds, and as for 'price' and 'prise' it is also at the basic end of the language and spelling spectrum. I am well aware that I make typos when on here, as do the majority, but 2 different errors repeated twice in 4 lines of text implies a poor grasp of English, not typos.

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I corrected fundamental misuse of English gramar

You might as well give up now. Misuse of the english language is endemic on this board.

You will treated daily to stories of people loosing money who should of known better. <_<

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You might as well give up now. Misuse of the english language is endemic on this board.

You will treated daily to stories of people loosing money who should of known better. <_<

Oops - think that sums up what I said about typos in one - missed an m!

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