Tuesday, June 5, 2007

What we have been saying for a long time…

Buy-to-let brigade could be the joker in the homes pack

In polite circles there is one C-word that remains taboo. Crash. We can whisper it or think it, but anyone saying it aloud faces ostracism from our property-obsessed culture. Yolande Barnes, head of residential research at Savills, said: “We are in uncharted territory. A lot of the market is based on the willingness to sink large amounts of wealth into housing. It is confidence-based. That tends to make it more volatile. There is even a problem if interest rates get to 6.5 per cent. That is the absolute biting point. That would probably trigger a household debt crisis similar to the late 1980s" and that is from an EA... not from a doom-monger!!

Posted by confused76 @ 12:11 AM (419 views)
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22 thoughts on “What we have been saying for a long time…

  • Whiteknight says:

    Oh. Things can happen even quicker than that …..

    Morning comes .. by lunchtime the currency is down 20% .. by evening its emergency exchange controls and rates 5%-10% higher.

    Thats how quickly things actually happen.

    This is why when i say that the Virtual Private World that is currently the financial world catches up with reality it will be like being punched out cold.

    I mean .. jeez.. what world do we live in when Russia launches an ICBM and has to hold a press conference the following day to say its a warning. Back in the good old days if somebody kept an eyebrow raised for a second too long then major troop movements occurred.

    Anesthetized is a polite way of putting it. Clueless is another. Thats the wunderkind that currently occupy the majority of financial instituations. Its uncharterd territory for them maybe.

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  • BTL is a temporary craze created by the artificially low interest rates of recent years. It was never seen as a particularly good thing to do with your money before this. Now interest rates are rising why should the economic rules be any different in the future? Tough s**t if greedy amateurs get burnt and remember you’re also liable for the shortfall after you’ve been lobster potted and repossessed.

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  • I agree Whiteknight it looks like it’s going to take WWIII before the finanacial markets actually sense that not everything is rosey in the garden.

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  • The wind seems to have changed recently – witness the many cautionary articles appearing in the quality press.

    Watch the comments from the EA’s – when they genuinely believe that BTL is a spent force, they can be relied upon to switch sides – after all, the last thing they REALLY want is people buying property ‘who are in it for the long term’ – all they want is property to sell – and re-sell..

    The market’s getting interesting again…!

    “Buy-to-let, Sell-in-debt”

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  • Guys,

    I think we are jumping the gun a bit. I agree the omens look very bad, but prices remain stubbornly high. Until those prices start to tumble, we don’t have a crash. We need interest rates of 7% and rising to really put the sh!ts up the asset-holders.

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  • At least 7%! An increase of 1% would only add £120 a month to payments on a 150k loan. We’re being told rates will maybe go up once more this then come down in 2008. A BTL acquaintance suggested it was a good time to buy as he expected prices to accelerate again once rates drop i.e. in about six months. Confidence in the market is still high amongst people who have made money.

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  • I agree with Royston. We have been here before – I recall many learned Bloggers saying 2005 would be an interesting year; then 2006 was going to be interesting; now its … [You get the picture].

    I recall an article in The Economist which predicted high levels of national debt, high house prises, trouble in the Middle East, continued high oil prices [etc etc you get the picture] and then went on to say it would take interest rates of 8% to 9% before the economy nose-dived. There is no sign that interest rates will rise this high. Again, there are risks on the economic horizon but some some risks never happen.

    What will we be saying when the new year dawns and interest rates are 5.75%? We’ll probably be saying “2008 will be an interesting year.”

    Anyone for Godot?

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  • C'mon Correction says:

    I agree Royston, we’ve had a couple of false dawns over the last couple of years. Only when I’m receiving the keys to a house that cost 30% more 5 years previous will i believe I’m buying a value for money property again.

    I disagree about rates having to hit 7%. Personally I think rates have already gone high enough to bring prices down(in the majority of the UK), it will take 6 months + to appear however. Rates at 6% will send shockwaves through the banks’ lending criteria – then things will get interesting.

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  • I agree with Royston, I’ve seen alot of ‘investment’ flats coming on the market recently, so the great BTL escape is underway, but they are still priced aspirationally at the moment. One person wants to sell there house and then rent it back for a minimum of 5 years at yield of 2.95%!!!! Others seem to be hovering about the 4% mark. It’s going to take alot more repossessions and panic to creep in before the prices really start to drop. No one in their right mind would put their cash in such a volatile investment when they can get 5.95% guarenteed in a bank account. Give it 6-12 months and I think many BTL escapees will be softened up to 20-30% reductions.

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  • waitingfor hpc says:

    the new trend is set. It takes a long time to change 10 years of boom. It will not happen on a way we can measure on this site from the papers. Look in the pubs and shops round your way …… when they look quite or empty – something is up. Forget a lot of these stats .. they are good but in the real world it is impossible to track trends. Pubs my way are quite, shops are quite and in my opinion nothing has happened yet! My taxi driver told me this morning the his mortage broker mate advised him not to buy a house now as the market was very ‘jumpy’. Real world.. real answers. IMHO when we see a ‘CRASH’ on here it will have already happened.

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  • I don’t think we’ll see a repeat of the last crash. This was particulalrly severe because Thatcher used high unemployment as a policy instrument to kill off the unions and create a dog eat dog society (all paid for by north sea oil, sale of 1.5 million council houses etc. etc.).

    Nowadays, it’s a completely different problem. No unions, no industry, service sector jobs, globalisation etc.. I reckon this time it will unwind fairly slowly, say max of 5-10% a year in cash terms, with real values eroded mainly by high inflation. I can’t see any government would risk upsetting hard working families in middle England so they’ll let inflation take the strain. Pity we didn’t join the Euro.

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  • waitingfor hpc says:

    cyril…..
    unemplyment is high here… just covered up?????
    No unions – what about postal strike, teachers strike threat, nurses strike threat?? TUC demanding higher tax rate of 50%???
    If inflation is left to run what of IR’s then? I run a mnfr company and inflation on my raw materials in the last 12 months has averaged 50% – I am passing this on……… you will pay it soon and see it.. so real wages go down……. unless IR’s and CPI are changed. If real wages go down then more people will be in hardship, and goods prices will continue to rise……..
    What about the exchange rate for sterling … if we allow inflation it will effect our currency??? More inflation??

    I see you point but feel there is far too much at play. Global prices of goods are going up, the very goods we imported for the last 10 years to make inflation go down.

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  • sold 2 rent 1 says:

    I think there is 6 months left in this property boom.
    I think the rate rise will be put off until July/August

    If the MPC do go for this month then the Lombard Street Research report (LSR) out on July 1st will show a hammer blow for housing affordability.
    The affordability index will be nearing the critical level of 80 points where the crash will start.

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  • Will prices continue to go up? will go down? how quickly? … in absence of a nice crystal ball noone can tell. And this depends A LOT on the specific location you are looking at. Statistics and newspapers… not too useful… more useful to look at:
    1. historical exact comparables (data up to a month earlier): http://www.houseprices.co.uk/
    2. the EA’s window ads
    3. the dynamics of asking prices: http://www.propertysnake.co.uk/

    Look at specific examples: a flat sold by a frend of mine in June 2005, on the same street I live, has been put on the market last month (i.e. in < 2 years!!) at an 80% mark up. Yesterday the asking price was reduced by 5%. Will it sell at that price? possibly... but what do we conclude? Would you invest all you have and beyond (i.e. taking a mortgage) in an asset having market volatility of 40% per annum? with current Price/Net Earnings > 35 (= 1 / net rental yield = 1 / 2.8%) ?
    To find an asset class with similar characteristics… see Nasdaq stocks in 2000

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  • shipbuilder says:

    Guys, as you’ve pointed out yourselves, the boom is already over outside London and it’s about to end here in NI. The market is all about sentiment and it will take a while for that to turn before the crash – prices are only held up now by seller stubbornness. I think IRs and the economy are now irrelevant other than the effect they have on sentiment. Increase in IRs or a downside to the economy will hasten the crash, but are not needed to start it.

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  • tony marshall says:

    BTL owners don’t have the luxury of sitting tight, as owner-occupiers do and as people did in the early 90’s – if things get tough for BTLers, they will buckle quickly.

    I see the crash as three simple phases – from ‘buy at all costs’ it slows to ‘wait and see’, followed by ‘don’t touch it with a barge-pole’. We are just entering phase 2 – how quickly this proceeds to phase 3 is open for debate, but proceed it will and, once we reach that stage, then you will see the crash happening.

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  • Has the crash happened yet? Of course not, and I don’t think anyone blogging here has really suggested that either.

    Are there signs that it’s beginning? Yes, there are – repossessions are up, CCJs are up (highest levels for ten years), new mortgage approvals are down for the third month running even though more properties are on the market, and the Land Registry’s figures for SALE prices (note to RightMove) show (small) price reductions in four out of ten regions (first time this has happened in seven years). Even the VI national house price measures show a continuing reduction in the rate of increase (not an actual decrease I’ll grant you; still going up but more slowly) and even their spinners admit that the 10% (or so) increase year-on-year that they’re currently showing is disproportionately affected by the silly boom in London (“inflation of up to 40 per cent for sales of multi-million-pound homes in parts of Chelsea and Belgravia” when “Most of these statistics give more weight to expensive houses. So the property spending spree many bankers have embarked on after receiving their annual bonuses has an unduly large impact on the overall UK figures”). If you add a couple of £million to the price of a house, and then sell a load of houses on that basis, that’s going to mask what’s happening elsewhere, of course. I don’t think anyone on this site is in the market for £5 million London penthouse, so a national average that is so skewed by such properties has to be of little relevance guys – I’m just looking at the averages locally, that’s where I “need” a crash to occur.

    Are all these indicators just a blip? Will it just turn out business as usual like it did in 2005? Do we need a 7%, 8%, more, base-rate to make things really happen? Well, those making crash predictions in 2005 would probably have been proved right if the BoE hadn’t dropped rates, so I think it’s a bit unfair to say they got it wrong – it was the BoE who got it wrong! By the same token, if the BoE do it again then maybe the current stats will just be a blip and the boom will last a little longer – it simply can’t go on forever though, mathematically as much as anything, and I don’t see the BoE being in a position to drop rates now anyway – the situation is worse now. As to needing 7% or more – repossessions are already up, County Court Judgements are likely to hit 1 million this year, the number of BTLs being sold has gone up 1 percentage point (if 1 in ten properties are now BTL as some figures say, 1% is a heck of a lot of properties coming onto the market!) AND all these stats are too old to take into account of:

    (1) the last rate rise in May
    (2) that, “about 900,000 borrowers [a]re set to come off these [fixed-rate mortgage] deals in the coming months and face a severe ‘payment shock’.”
    (3) and that, “If base rates rise by another quarter percentage point next Thursday, then about 2.4m homebuyers who are still paying standard variable rates will face monthly costs 41 per cent higher than they were four years ago.” (yes, I realise many of these will have bought their property 10 or 20 years ago and so their mortgages aren’t that big anyway, but there’ll still be a decent proportion of that 2.4m who purchased more recently)

    It would therefore seem to me that a base rate of just 5.25% was already doing a very nice job, thank you very much, and with the UK populace £1.3 trillion in debt, the anticipated 5.75% by August is likely to cause more than enough trouble for more than enough people (and would you bet the farm that 5.75% is definitely the highest it will go – I certainly wouldn’t).

    It’s happening, but no-one wants to be the first on their street to drop their price, or the first person at the dinner party to admit they lost £X thousand on their BTL “investment”, so of course I agree it will take some months yet to see the full effects.

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  • Latest news… it;s going down the drain… and fast….

    Cheap fixes disappear
    Lenders have been pulling their cheapest fixed-rate mortgages ahead of the Bank of England’s interest rate announcement on Thursday
    http://business.timesonline.co.uk/tol/business/money/mortgages/article1887707.ece

    “Many economists believe that once interest rates peak in the current cycle, they will begin to fall again quickly. Some borrowers may therefore be prepared to take some short-term pain in the hope that their payments will fall again next year. However, if you cannot afford to take the risk of interest rates remaining high, you should go for a fix.”
    PUNTERS!!!!!

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  • sold 2 rent 1 says:

    Just found this graph in the forum section

    HPI now looks set to breakdown, and very soon

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