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insidetrack

Pent Up Supply

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One of my pet hates is hearing VIs talking about "pent up demand" as if it is some sort of white knight that is going to send house prices back up again tomorrow.

In a rising market the buyers set the prices by bidding them up, now house prices are falling it is the sellers who set the prices. It is up to the sellers to start offering prices down.

We know that house sales are at record low numbers of transactions. The supply of housing for sale is piling up week by week. The buyers have disappeared. There is a huge amount of pent up supply. So over the next couple of years the sellers are going to have to drop their prices below what is considered the then current market value.

And as the prices are chased downwards, the pent up supply is only going to increase as values fall, equity vanishes, resets kick in, BTL portfolios are liquidated, homes repossessed and jobs vanish.

Demand, pent up or otherwise, will not appear in a falling market.

Edited by insidetrack

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In a rising market the buyers set the prices by bidding them up, now house prices are falling it is the sellers who set the prices. It is up to the sellers to start offering prices down.

We know that house sales are at record low numbers of transactions. The supply of housing for sale is piling up week by week. The buyers have disappeared. There is a huge amount of pent up supply. So over the next couple of years the sellers are going to have to drop their prices below what is considered the then current market value.

And as the prices are chased downwards, the pent up supply is only going to increase as values fall, equity vanishes, resets kick in and jobs vanish.

Pent up demand will not appear in a falling market.

What you say makes perfect sense. But...

Is there a link for the total number of houses for sale? On my Property Bee watch, the numbers haven't changed at all, with about a 5-7% sale rate every week, implying ~14-20 weeks on the market on average. Also last week there was ONE price reduction in 141 properties :-(

This HPC is not showing up much where I live.

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Possibaly thats one thing that could happen the others are:

1)Sellers can't drop prices because they can't afford the negative eq. Whats the point in selling if you are going to ow 10k to the bank afterwards? So they rent there place out and find some where else to rent for themselves until the market picks up.

2)Morgage conditions slowly return to what they were 18 months ago and the market picks up. There is some evidance that this is happening i.e 2 year fix falling and interest rates on savings comming down.

Personally I think number 2 will happen but lending criteria will not be as loose as it was before i.e 125% mortgage.

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Demand, supply and price are all inextricably bound together. Get one out of whack and the other 2 suffer. Gordon's decade of miracles put house prices out of whack therefore demand crashes increasing supply. THere is no such thing as "pent up demand." If it is "pent-up" it is no longer active and not part of the economic equation.

I just received our local EA sheet. Full--I mean FULL--of "new instructions" and "new prices." The wheels are geting greasier by the hour as the Gordon rollercoaster builds momentum on the biggest dip of all time.

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I like the idea of pent up supply. I think it is valid.

There are probably a lot of people who would like to sell their house but are put off by the falling prices. At some stage they will have to take the decision to sell for reasons other than financial and this will flood the market with properties.

I think it is as valid as pent up demand being the idea that buyers will flock in allk of a sudden.

Let's not forget a lot of the buyers will also be sellers.

Nice one Mr Track.

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Possibaly thats one thing that could happen the others are:

1)Sellers can't drop prices because they can't afford the negative eq. Whats the point in selling if you are going to ow 10k to the bank afterwards? So they rent there place out and find some where else to rent for themselves until the market picks up.

2)Morgage conditions slowly return to what they were 18 months ago and the market picks up. There is some evidance that this is happening i.e 2 year fix falling and interest rates on savings comming down.

Personally I think number 2 will happen but lending criteria will not be as loose as it was before i.e 125% mortgage.

I disagree with point 2. SWAP rates fell ages ago, and lenders have only just started to reduce rates, and they are still not cutting by as much as they are saving through cheaper wholesale borrowing. Rates are still far higher than they were a year ago. Thing is, as soon as GDP goes negative, lending anything to anyone, even an extremely credit worth person, becomes very risky, and so the risk gets added to the price. I think we'll see SWAP rates start to go up soon as further poor economic performance is unveiled and the wholesale traders get worried about the potential risks that poses when people lose their jobs and can't service their debts.

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I've been rubbishing the demand myth for some time now. An additional factor beyond the usual quoted causes for the over-supply, like credit crunch, is that the boom last year probably sucked in a lot of this year's 'quota' of first-time buyers. So as well as all those FTBs who can't get the finance or are waiting for prices to fall, there's probably a lot who rushed to buy last year when property prices 'only ever went up'!!

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I agree with the OP.

The bulls seem to think there is a great number of FTB's waiting to pounce. The fact is that there probably won't be, as very few will be able to save a 10 or 20% deposit now that 100% mortgages have gone and they won't be able to get a liar loan now either. The madness of the past few years has been helped by FTB's getting 100% mortgages at five, six times their salary. Take these people away and the numbers diminish quite rapidly.

How many people in their 20's do you know who have savings? Very few I would guess. More likely they will have a student loan and a couple of grand on credit cards as well.

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I disagree somewhat. Just as the property pornstars talked stuff up on the way up we have the crashinistas here talking it down.

Would anyone deny that there is demand for housing in the U.K? It’s been an aspirational aim for many for some years and I see no change at all in the attitude that it is "better to buy than rent" regardless of the rectitude of such a stance. Many people will have been priced out of the market. For me it’s at what level does this demand become effective?

The recent idiocy has been fuelled the easy availability of money. FTBs and BTLs were able to access the market due to loose lending. I don’t see a return to these practices any time soon. However I do not believe that we’re seeing a collapse in sentiment. People who do not have to sell, won’t. Those that do have to sell will be mercilessly exploited by those that have access to adequate capital to either buy cash or secure preferential loan terms. Personally I hope BTLs take a serious bath, but if they can rent their properties and service their debts why would they? If they manage to survive 10 years, they will probably even turn a profit. At the moment I'd love to know how many propertie cannot be rented or the rent defaults in the sector,

Seems to me that it’s a somewhat abnormal picture at the moment. There is a record low in Mortgage approvals, record low transactions, coupled with record declines in prices. Are not low volume systems subject to higher fluctuations? However, the wider market does not reflect this (IMHO). Many houses are being advertised at peak values, They ain't coming down either, they may not be selling but this does not mean that the sellers will necessarily decide to take a bath on the price. They may simply decide not to sell at all. It would be a brave (realistic?) man after all who sold what he was told yesterday was worth 300k for 200k today.

However, owning a house is still an aspiration for many people. This site itself bears evidence to this. There are FTBs out there who have refused to join the madness due to their better risk assessment skills than many. These people may well have made the choice to save and buy later. Ignoring that there is demand seems perilous to me. There will come a point at which people will rejoin the market. Where this point lies is one for the alchemists I’m afraid.

Of course if there’s a recession and unemployment strikes all bets are off. It’ll be Armageddon. Debts are all very well if you can service them. If you can’t game over.

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Possibaly thats one thing that could happen the others are:

1)Sellers can't drop prices because they can't afford the negative eq. Whats the point in selling if you are going to ow 10k to the bank afterwards? So they rent there place out and find some where else to rent for themselves until the market picks up.

2)Morgage conditions slowly return to what they were 18 months ago and the market picks up. There is some evidance that this is happening i.e 2 year fix falling and interest rates on savings comming down.

Personally I think number 2 will happen but lending criteria will not be as loose as it was before i.e 125% mortgage.

1) 40% of UK homes are owned outright, with no mortgage at all. So all of these can immediately be offered at whatever price the householder wishes without a second thought. Add in all those homes with substantial equity and your argument doesn't really hold water.

2) By your own admission mortgage conditions aren't going to get back to where they were 18 months ago. In fact the one item that you identify, irresponsible lending, is all that's really changed so far, but the removal of that one item was all it took to drive prices down by 9% in 9 months! And let's be clear, there will be no return to irresponsible lending for at least a generation. But much worse is yet to come for the UK property market, just lift your eyes and look towards the horizon. Unemployment is likely going up, living standards will likely fall, immigrants will likely go home, and all the time the stock of unsold homes is steadily increasing.

There's a growing tendency by property bulls to console themselves that somehow lending conditions will return to "normality". Well, they already have, what we have today is normaility! In fact today's mortgage market is pretty open, anyone with a 25% deposit and a sensible income to loan ratio has no problems getting a mortgage at historically fairly low rates. There's absolutely nothing restrictive or unusual about today's mortgage conditions.

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Of course, there is still an aspirational demand for houses, but that's not the same as a real demand by people who can afford, or are reasonably close to affording, to buy. After all, a lot of people would snap up a second or third home if prices were cheap enough. You can only count demand in terms of people who have a realistic chance of buying.

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I agree with the OP.

The bulls seem to think there is a great number of FTB's waiting to pounce. The fact is that there probably won't be, as very few will be able to save a 10 or 20% deposit now that 100% mortgages have gone and they won't be able to get a liar loan now either. The madness of the past few years has been helped by FTB's getting 100% mortgages at five, six times their salary. Take these people away and the numbers diminish quite rapidly.

How many people in their 20's do you know who have savings? Very few I would guess. More likely they will have a student loan and a couple of grand on credit cards as well.

Can't agree more with this comment. The supposistion that there are some significant volumes of FTBs or otherwise with hordes of cash is about as convincing as Gordon Brown is Prudent! Lots of people i know are well educated have half decent lecturing posts etc and are in the proverbial quagmire created by greedy VI's, stupid mortgage lending rates, easy credit, our dumbo-pea-brained calamity of a PM reinforced by his unquestioning sychophantic brigade and do not have some vast amount of ready-cash in their pillows. The post has got very slippery there will be some astronimical winners when the sh*t hits the rotary blades but for the masses and generations to come they will be those paying for the 'miracle economic crusade merry go round' thats spun (how apt) for the past 11years.

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I disagree somewhat. Just as the property pornstars talked stuff up on the way up we have the crashinistas here talking it down.

Would anyone deny that there is demand for housing in the U.K? It’s been an aspirational aim for many for some years and I see no change at all in the attitude that it is "better to buy than rent" regardless of the rectitude of such a stance. Many people will have been priced out of the market. For me it’s at what level does this demand become effective?

The recent idiocy has been fuelled the easy availability of money. FTBs and BTLs were able to access the market due to loose lending. I don’t see a return to these practices any time soon. However I do not believe that we’re seeing a collapse in sentiment. People who do not have to sell, won’t. Those that do have to sell will be mercilessly exploited by those that have access to adequate capital to either buy cash or secure preferential loan terms. Personally I hope BTLs take a serious bath, but if they can rent their properties and service their debts why would they? If they manage to survive 10 years, they will probably even turn a profit. At the moment I'd love to know how many propertie cannot be rented or the rent defaults in the sector,

Seems to me that it’s a somewhat abnormal picture at the moment. There is a record low in Mortgage approvals, record low transactions, coupled with record declines in prices. Are not low volume systems subject to higher fluctuations? However, the wider market does not reflect this (IMHO). Many houses are being advertised at peak values, They ain't coming down either, they may not be selling but this does not mean that the sellers will necessarily decide to take a bath on the price. They may simply decide not to sell at all. It would be a brave (realistic?) man after all who sold what he was told yesterday was worth 300k for 200k today.

However, owning a house is still an aspiration for many people. This site itself bears evidence to this. There are FTBs out there who have refused to join the madness due to their better risk assessment skills than many. These people may well have made the choice to save and buy later. Ignoring that there is demand seems perilous to me. There will come a point at which people will rejoin the market. Where this point lies is one for the alchemists I’m afraid.

Of course if there’s a recession and unemployment strikes all bets are off. It’ll be Armageddon. Debts are all very well if you can service them. If you can’t game over.

I accept your points Grills and I don't think we disagree. The market will take years to correct downwards and it can fall a long way. Obviously, at some point, buyers will come in to establish a price equilibrium but I think that is years away.

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Of course, there is still an aspirational demand for houses, but that's not the same as a real demand by people who can afford, or are reasonably close to affording, to buy. After all, a lot of people would snap up a second or third home if prices were cheap enough. You can only count demand in terms of people who have a realistic chance of buying.

Agree,

Same as most people wanting to own a Ferrari. They want one, but can't or won't pay for it.

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1) 40% of UK homes are owned outright, with no mortgage at all. So all of these can immediately be offered at whatever price the householder wishes without a second thought. Add in all those homes with substantial equity and your argument doesn't really hold water.

2) By your own admission mortgage conditions aren't going to get back to where they were 18 months ago. In fact the one item that you identify, irresponsible lending, is all that's really changed so far, but the removal of that one item was all it took to drive prices down by 9% in 9 months! And let's be clear, there will be no return to irresponsible lending for at least a generation. But much worse is yet to come for the UK property market, just lift your eyes and look towards the horizon. Unemployment is likely going up, living standards will likely fall, immigrants will likely go home, and all the time the stock of unsold homes is steadily increasing.

There's a growing tendency by property bulls to console themselves that somehow lending conditions will return to "normality". Well, they already have, what we have today is normaility! In fact today's mortgage market is pretty open, anyone with a 25% deposit and a sensible income to loan ratio has no problems getting a mortgage at historically fairly low rates. There's absolutely nothing restrictive or unusual about today's mortgage conditions.

With no secured credit cards/loans etc?

:ph34r:

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On a side issue, I was watching the news last night when I think Milliband referred to Brown as the 'greatest chancellor on record' or something to that effect. From an ignorant point of view it does seem he has kept the economy going well for ten years, but when you realise this has all been on the back of people borrowing huge amounts of money coupled with the massive house price bubble which is all due to collapse horribly now you wonder what Brown's reputation will be like in 5 or 10 years.

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One of my pet hates is hearing VIs talking about "pent up demand" as if it is some sort of white knight that is going to send house prices back up again tomorrow.

In a rising market the buyers set the prices by bidding them up, now house prices are falling it is the sellers who set the prices. It is up to the sellers to start offering prices down.

We know that house sales are at record low numbers of transactions. The supply of housing for sale is piling up week by week. The buyers have disappeared. There is a huge amount of pent up supply. So over the next couple of years the sellers are going to have to drop their prices below what is considered the then current market value.

And as the prices are chased downwards, the pent up supply is only going to increase as values fall, equity vanishes, resets kick in, BTL portfolios are liquidated, homes repossessed and jobs vanish.

Demand, pent up or otherwise, will not appear in a falling market.

Some sellers will break ranks and start dropping their prices. Anyone not following suit starts to look pretty foolish, and I can't see EAs wanting to have price sitters on their books, racking up internet fees and survey costs. The news is all so bleak, that there is no way back for the housing market now. No increases in house prices before 2015 I'd guess.

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Has not HBoS written off something like £1.3bn in unpaid mortgages? We were talking in the pub last night what this actually means. If someone defaults on a mortgage the bank can reposses and sell the property, ie there should be very little if any money to "write off".

When you get huge sums like this "written off", does it mean that some people are being allowed to stay in the property without paying? This would not surprise us if it were happening, as the government behind the scenes will be doing everything it can to hold back on mass repossessions.

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Many houses are being advertised at peak values, They ain't coming down either, they may not be selling but this does not mean that the sellers will necessarily decide to take a bath on the price. They may simply decide not to sell at all. It would be a brave (realistic?) man after all who sold what he was told yesterday was worth 300k for 200k today.

These aren't the properties that are setting the market. It's the divorces, the job moves, and the bereavments that are dictating prices. And as you said, if recession bites then tomorrow this list will be augmented with repossessions.

The indignant homeowner holding out for £300k in a £200k market can just sit on the side lines and fume, they're irrelevant.

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In a rising market the buyers set the prices by bidding them up, now house prices are falling it is the sellers who set the prices. It is up to the sellers to start offering prices down.

That makes it sound as if there's some kind of responsibility on buyers/sellers to set prices in a rising/falling market, but in fact the most prudent response to an unstable/price-opaque market may well be to decline to deal.

Okay, marketing a property in the vain hope of finding the ultimate greater fool doesn't make a lot of sense, but hey, it's their money and time.

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Guest An Bearin Bui
I like the idea of pent up supply. I think it is valid.

There are probably a lot of people who would like to sell their house but are put off by the falling prices. At some stage they will have to take the decision to sell for reasons other than financial and this will flood the market with properties.

I think it is as valid as pent up demand being the idea that buyers will flock in allk of a sudden.

Let's not forget a lot of the buyers will also be sellers.

Nice one Mr Track.

This particularly applies to places that were bought at the trough of the last crash. I know of people who bought flats for miniscule sums of money in the mid-1990s (e.g. 40-50k) and they have just held on to them because they almost own them outright now and they have since trebled in value (or more). Often it's a case of a couple where they both bought singleton flats in their 20s, got married and so sell one flat to get a deposit for a house and then hang on to the second one and rent it out just because it's easy money when they bought so cheap.

At some point people like that will want to realise their gains and get out. The VI argument of pent-up demand totally ignores this factor of sellers who bought cheap wanting to realise some gains before it evaporates any more. They will be more inclined to sell up rather than see their paper wealth continue dropping. At the moment people like this are still holding out assuming that this is just a blip but once the falls seem more permanent they'll want to sell.

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1) 40% of UK homes are owned outright, with no mortgage at all. So all of these can immediately be offered at whatever price the householder wishes without a second thought. Add in all those homes with substantial equity and your argument doesn't really hold water.

But are these properties likely to be owned by people who must/want to sell? Personally I suspect that would-be-sellers are more likely to be younger, more leveraged, and still at a stage in their lives and careers where mobility is relatively important. The people with no or low mortgages are likely, by and large, to be more settled.

As for the rest of your post, I agree. However I still think it makes sense for a property owner to sit tight at the moment, because the current market is not delivering price transparency so transacting (whether as a buyer or seller) is a risk. And let's face it, the mortgage-free OO is probably risk-averse (the risk-takers all MEWed ;))

(typo)

Edited by huw

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But are these properties likely to be owned by people who must/want to sell? Personally I suspect that would-be-sellers are more likely to be younger, more leveraged, and still at a stage in their lives and careers where mobility is relatively important. The people with no or low mortgages are likely, by and large, to be more settled.

This is a complete guess, but I'd have thought that mortgage free properties were very likely to be offered for sale. The reason being that, as you say, a disproportionate number of them will be owned by older residents, and at the risk of being macabre, they're rather more likely to shuffle off this mortal coil!

Okay, you could argue that the beneficiaries will then rent it out rather than sell. I'm not so sure, I suspect a lot of bereavement properties end up as forced sales in order to meet death duties. Certainly when ever I've been buying houses (something I've done in both booms and busts) I've been struck at just how many have clearly been inhabited by an elderly person, and when I ask if they've passed on the EA generally shuffles his feet a bit then acknowledges the fact.

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  • 401 Brexit, House prices and Summer 2020

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      • down 5% +
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      • up 5%



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