Saturday, April 27, 2013

Not sustainable

Why Uk house prices must crash

Moreover there are clear inflationary pressures in the system. At some stage base rates will have to increase and – assuming that the banks do not take a margin hit, a safe enough bet – that means sharply higher mortgage costs.

Posted by happy mondays @ 11:13 AM (14402 views)
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44 thoughts on “Not sustainable

  • It’s habit, whenever I read an article that has a spelling mistake in the first line I stop reading and don’t care how important the writers message is, if you can’t take enough care to get your article right I’ll presume you lack the same care about your thought process.

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  • Article is a month old.

    The Coalition are doing their best to ensure prices rise. There’s an election coming.

    I thought the market in London had topped a couple of months back, but our politicians are a determined bunch ~ and I was wrong, it seems.

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  • Prices are nuts in London, higher now than ever before.

    The whole wealth of the UK, it seems, is being sucked up into housing. All to allow a clique of fools to keep their jobs.

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  • stillthinking says:

    Happy Mondays found a great post IMO. Nobody is ever going to read this article but it is clinically clear. Things cannot continue.

    Of course I know everybody on this site has been saying that since 2005 but if something cannot continue for ever then it won’t. In the end the UK pensioners are going to be the ones that get blown out (the very same group that voted for the Labour administration).

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  • happy mondays says:

    @Alan – yes over a month old so thats another month of increased debt! This cannot continue forever, the props will be pulled, IR’s will increase, then we shall see the real state of the housing market that has been hidden behind the veil of deceit !

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  • Things cannot continue.

    I have been saying that since – 1999……

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  • This cannot continue forever, the props will be pulled,

    There will be no big falls, inflation will do it all.

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  • Public debt will increase but inflation will not, imho, come from that. The real power of money creation comes from private debt and what befalls that will have much more of a bearing on the future of our economy. We have at present an unholy alliance between state actors, lenders and the indebted. The only logical conclusion is deflation, but with those actors turning on themselves. But rest assured the will fight to ensure the the hard working productive people foot the bill for thier confiscation of wealth.

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  • Public debt will increase but inflation will not, imho, come from that. The real power of money creation comes from private debt and what befalls that will have much more of a bearing on the future of our economy. We have at present an unholy alliance between state actors, lenders and the indebted. The only logical conclusion is deflation, but with those actors turning on themselves. But rest assured the will fight to ensure the the hard working productive people foot the bill for thier confiscation of wealth.

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  • happy mondays says:

    hpwatcher – @5 I have been saying that since – 1999…… Then a few more years will make no difference, as you know prices in 1999 look cheap now..
    @6 There will be no big falls, inflation will do it all. Only if we have wage inflation as well otherwise who will be pushing prices up !

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  • @ HM,
    “Moreover there are clear inflationary pressures in the system. At some stage base rates will have to increase..”

    It’s like the Titanic…the stern is lifting and a lot of people (like Express readers) think the view is getting better. They laugh at the front of the ship which is under water and think they are well off. I guess that they don’t realise that the ship is going down and they are part of it.

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  • this cannot continue…
    But it can continue! Prices are well supported by rents, unlike what happened in Ireland, Spain, or the USA. There was no construction bubble, unlike Ireland, Spain, or the USA. It’s just stupid to compare income-to-house-price multiples and assume they will revert to the mean. Interest rates have fallen, people are living longer, wealthy baby-boomer pensioners are investing in safe stable investments (property) for their retirements.

    Reversion to the mean is not a fact of life, and certainly not a fundamental rule of investing. The world population is growing; it won’t revert to the mean. The value of the pound sterling keeps falling; it will never revert to the mean (once upon a time, £1 = 1 lb of gold). House price to income ratios won’t revert either: the world has changed, the economy has changed. “When the facts change, I change my mind.” Well, I’m changing my mind on a HPC. I just regret that I was too slow to notice the facts changing.

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  • mark wadsworth says:

    Drewster, are you going to buy soon then?

    I’m hanging on for another year or so in the hope that something happens.

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  • happy mondays says:

    drewster agreed but there is a ceiling which was reached in 2007 we are nearly there again… Sentiment is changing that high house prices are not a good thing! i personally think prices will drop but maybe not in the time line i would like, however who knows! We are as dumb now as we have been in the past, greed & the lust for gold will bite us in the ass again !

    alan yes the view is nice at the front (apart from the icebergs) but don’t look behind at the rising water 🙂

    mark wadsworth – “wealth is the transfer of money from the impatient to the patient” But don’t hold me to that 😉

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  • Mark- wait two years if you can. The prospect of an incoming labour government plus the mansion tax will see major drops in london and the SE I feel. I wouldn’t want to buy only to see that happen 🙂

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  • The question for me is “Are there sufficient BTLs to fill the lower end of the market?” Certainly young families are not going to be doing that with graduates leaving uni carrying enormous debt and with so many out of work – and with salaries static. I think not, the £300,000 plus buyers and sellers can support the EAs and mortgage providers for only so much longer.

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  • Mark,
    I’m actively looking; but equally I’m in no great rush. Supply is fairly limited, so it’s a matter of waiting for something I like to turn up.

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  • Brightonrentfoddfer says:

    Nomad, you’re spot on, there aren’t enough sheep at the bottom to sustain the prices at the top, as some of the EA’s have admitted, transactions are very very low, & this is their bread and butter. Unfortunately nothing will seriously happen until after the next election, unless the Euro has some bearing on the UK Ponzi scheme ??

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  • I agree with Drewster.

    The ‘mean’ on that graph is meaningless. A straight line from 3 to 5 would more accurately smooth out what has happened over the years. Why should it not go to 7 in a few years’ time? Already we have the Government supplying the deposit – so we only have to compare the monthly payments on the mortgage to the comparable property rent to see that buying is cheaper.

    Interest rates can always halve again. 3% mortgage can go to 1.5% mortgage. That halves the monthly repayments and (crudely) doubles the price. Once that’s happened they can halve again to 0.75%. And so on. It’s the exponential function in reverse.

    As to the argument that interest rates will ‘revert to the mean’ – why? Since 1980, interest rates have been coming down year after year. They can continue to halve – as above. Why would they go up? The government can’t afford for them to do so. They will print money before that happens – but if enough mortgages are taken out, they won’t need to do that.

    I’m not saying that the above is advisable or in any way sane – but that is what is happening. It will likely blow up at some point, but that could be years away yet. And, given the way that the government has been behaving – can you honestly say that money in the bank will be worth more than the equity portion of a super-inflated house price at that time? Or that there won’t be some debt relief, or re-set of the financial system?

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  • @16 There is definitely an argument that there has been a new normal since the base rate went down to 5%, which makes the reversion to the mean a bit of a pipe dream, as the base rate would have been much higher for most of the years that the “long-run average” income ratio was calculated from. I suspect when all this is over, base rates will go beyond 5% for a while, but who knows?

    The real question is: can the government maintain low interest rates long enough to recapitalize the zombie banks and zombie households (and to a lesser extent, themselves)? Can they keep the base rate low for as long as Japan has, or will some black swan event force their hand?

    Wage inflation is lower than inflation, but it’s still positive. Since the credit crunch, salaries have risen over 10%, according to the ONS. The median earner in London only needs a 20% pay increase before they start paying higher rate tax.

    Near me, in London, prices are rising alarmingly fast. But I don’t see where the momentum will come from after the first round of HTB. By the time they realise they will either have to extend it or create a crash, the typical FTB will have almost as much student debt as I have saved up for my deposit.

    We are at the limits of everything. How much lower can mortgage rates go? How much more support can the government offer? How much more can money can the next generation be expected to find when the proportion of their salary that goes straight to university debt and the older generations’ palliative care will be so much higher?

    The only issue is that the FTBs aren’t really the ones buying most of the houses, but I suspect that that will change as more of the voting population is left out of the market…

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  • mark wadsworth says:

    Cornishman, fair point about it being mathematically possible to continually halve interest rates for ever, what you overlook is real interest rates, which are to all intents and purposes zero.

    So I’ll concede that if we had no inflation and real/nominal interest rates halved that house prices would approx. double, but shifting real interest rates from zero to slightly negative has a much smaller effect.

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  • Real interest rates are already negative, I would have thought – but still people keep buying gilts/treasuries as a ‘safe haven’. That forces the price of them up more and reduces interest rates further. The only way that will stop is if there is somewhere safer for their money to go. Where is that likely to be in the near future?

    It seems to me that a lot of people buying houses appear to only look at the monthly cost of the mortgage and do not want to appreciate the massive amount of capital they are borrowing/committing to paying back – so they continue to bid up prices if the mortgage is cheaper than renting.

    I can’t see any other way of all this ending other than with a big bang – but what do you want to be left holding when the music stops? A house part paid for, or some digits in a bank account? What do you reckon will be treated more favourably by the powers that be, given recent experience?

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  • mark wadsworth says:

    Cornishman: “what do you want to be left holding when the music stops? A house part paid for, or some digits in a bank account? What do you reckon will be treated more favourably by the powers that be, given recent experience?”

    That is a very good question and I have been worrying about this a lot lately.

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  • @ 20

    Same here.

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  • happy mondays says:

    Ditto.. Has been my concern.. Maybe time to move on!

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  • If the last bears are ready to capitulate, that can only mean one thing 🙂

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  • Well, you guys. Those replies were a surprise! I thought I’d be shot down in flames.

    It’s a sad state of affairs though that buying a home has to come to this.

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  • happy mondays says:

    Yes cornishman a sad state indeed! Time will tell..

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  • Lots of good points above.

    What I’m surprised about, which some posters have touched on, is the level of economic madness that UK government is likely to pursue to keep the house price bubble going. Seems I underestimated the determination of UK government to avoid a 90s style crash……but the problem is that the fools have raised the stakes to an high degree. I feel that EVERYTHING is being thrown on the table.

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  • I employ ten graduates that range in age between 22 and 28. when I graduated all my peers were talking about getting on the property ladder. i haven’t heard one of the ten graduates refer to buying a house or flat in the last three years. i am based in London. The older graduates owe money, the new ones owe a huge amount which is due to rise as the increased student loads start coming through. The average 1st time buyer may now be in their mid thirties, but it could be that the 1/2 generation behind isnt even thinking about buying a property. Therefore, we could gradually be moving to a model where renting becomes the dominent form of house usuage, especially if respective governments contunue to prop up existing owners.

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  • @21 Me too! That’s scenario has been my biggest worry for a long time (and one I’ve been trying not to think about). Even in the worst case scenario I can’t imagine a a savers “haircut” happening in the UK (a la Cyprus) [please tell me this could never happen in the UK] but I have no doubt that if things go very bad very quickly it will be savers who suffer so that debtors don’t have to.

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  • stillthinking says:

    Why not move your wealth out of the UK then? It’s not a choice of savings in sterling or a mortgage on a property. If they both seem bad avoid both. I think anticipating an additional shift from savers to debtors seems a bit speculative to me. Global rates are going up over the next decade because we spend more than we save. We spend more than we save in the UK, thats a biggie and we are on the last ride of it. There is going to be a competition for real savings at some point for sure, and you don’t want to already be in debt as that starts to come on. I think a lot of people conflate their own personal valuations of their time and life situation with a realistic appraisal of house prices in the UK. If you have no time left and you are forced into buying by the various machinations of the state, then thats that, but that does not in itself make UK housing a good buy.

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  • mark wadsworth says:

    HPW: “Seems I underestimated the determination of UK government to avoid a 90s style crash……but the problem is that the fools have raised the stakes to an high degree. I feel that EVERYTHING is being thrown on the table.”

    Me too, despite Drewster’s take on this (which is not completely without foundation) it amazes me that the UK government has got away with it for so long, they keep doubling up and doubling up. Problem is distinguishing real economic fundamentals from short-term government interference.

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  • @28 Can you give me a few specifics, please, re. what I might look in to? I’m just an ordinary Joe so I don’t know much about investing. It is only the fact that I feel, as a saver, that I am being fleeced with low interest rates that has prompted me to look at anything more radical than a cash ISA (i.e. shares, gold, peer-to-peer lending) so I don’t know what the alternatives you refer to are. Thanks.

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  • Drewster,

    Population levels or the value of £ to gold are just not things one would expect to revert to mean.

    Wages to house prices are more likely to be mean reverting, as there is a very real and obvious link between salaries and house prices.

    The only factor you cite that might suggest a “new paradigm” would be permanently low interest rates – although even if that is what happens we will at best see house prices stagnate.

    From here there is no room for growth without wage inflation. I suppose the Government could tomorrow determine that the income of all public sector workers will double. That would do it!

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  • Grumpy Bob,

    I’d suggest you’d be better investing your time in productive activity, as opposed to trying to work out the next investment sure thing.

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  • sibley's b'stard child says:

    What a depressing read.

    Is this a case of ‘they’ve won’ or the last bear turning bull?

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  • happy mondays says:

    @ 33 – i don’t think anyone has won, but they might be able to prop prices up for who know’s the time scale, i think it’s how long you want / can wait, also cash in bank accounts getting sucked dry possibly Cypriot style ! However g/ment can only keep juggling for so long & sucker punches are always nearer than you think!
    I personally think the main article is correct, but time span & bank runs make me nervous !

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  • @32 Sound advice bellweather but I didn’t mean to give the impression that I’m looking for the next big thing or any form of get rich quick scheme. Just looking to not lose ground by saving*.

    * Isn’t that sentence bizarre? What a world!

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  • I think it comes to a head in about 20 years time and that it will be lack of provision for old age which brings the current pretend and extend party down .

    – people will be retiring with at best a house and no savings and no income other than the state pension
    – many people will be retiring with a rented house and no income other than the state pension
    – the generation in work will have to bear the entire cost of those in retirement plus their own accommodation costs and won’t be able to save for old age

    So the norm will become spending everything you have to keep some semblance of demand in the economy and being at the mercy of the next generation to support you entirely in your old age on a pay as you go basis .

    Sooner or later people are going to cotton on that their taxes are going direct to landlords and demand that accommodation prices are brought down .

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  • mark wadsworth says:

    SBC, it’s clearly a case of the last bears turning bull.

    Market tops (and bottoms) are always like that, you start to think it will never come down/go up again. And then it does.

    I fail to see how the UK economy is in any better shape now than it was when the last mini-price-crash happened in 2008-09.

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  • sibley's b'stard child says:

    Thanks MW, I needed that like my wife needs platitudes.

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  • SBC, it’s clearly a case of the last bears turning bull.

    Probably. But there are two important factors:-

    i. Support of housing needed for 2015/16 general election, which may go on for a few more years
    ii. Much of the UK economy is now tied to housing. So if that goes, all may go with it….and I can’t afford for it to take my savings too!

    BUT, it’s more likely to be zombie economy for a good few years, before anything radical happens on the housing front.

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  • 12 – Drewster. Sorry Drewster but you are wrong, everything returns to the mean eventually, its one of the laws of statistics and to add to that, the further a market moves away from its mean the harder it will revert back to it. The more a market is unaturally manipulated by QE and virtually zero interest rates, the more likely the market will natually force price action back below the mean.

    If you look at the house price bubble graph, the only thing that stopped prices falling back hard through the mean was massive QE and low interest rates, since then price has gone nowhere, it has not risen substantially as a whole it just put the brakes on the price falls. Eventually those brakes will be removed and that price will continue in the direction it was meant to.

    It is also not stupid to compare income multiples to price, because that is the actual mean and that is the what in the long term feeds the market, a sustainable supply of buyers. As soon as first time buyers are not able to compete the market is dead which is where we currently are. First time buyers are the lifeblood of the market and those are the ones where income multiples are key. Stretch over that 3.5 multiple and you get a bubble and run out of the blood in the system.

    The only way the housing market will fire on all cylinders again is when prices fall hard through the mean and we kick off all the over leveraged home owners to bring supply back to the market. Those over leveraged home owners, the ones not smart enough to pay off a big chunk of their mortgages while rates are historically low are the weak hands. That is how all markets work and the housing market is no different, look back through history, we seem to forget history and do not learn our lessons.

    Interest rates will rise and again they will rise way over the long term average before settling back down again, again look at history. QE will ultimately bring about an inflationary spike in commodity prices that will force interest rates higher. Historically we have never printed so much funny money, and QE always ends badly, again look history. Those that say its different now, sorry but its not, apart from the fact that the bust is likely to be much larger this time around. Politicians are baffoons, if they left the markets to correct naturally we would already be in much healthier position economically.

    You also say world population will not revert to the mean, it will one day, maybe not in our life times but eventually nature will force it to when there are too many mouths to feed,

    In my humble opinion all good things come to those who wait. I am a first time buyer to, I am nearly 40 years old but for the last 8 years I have saved, saved and saved a little more. Eventually things will turn in the favour of the first time buyer, if you have been smart and saved you will be in a prime position to take property from the weak hands, its all a matter of patience.

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