Thursday, May 14, 2015

Property is bubble 1 ready to pop

MoneyWeek: Three bubbles that are ready to pop

Cheap money, artificial credit, and zero interest policies have created all sorts of bubbles since 2008. Here are three that are ready to pop.

Posted by andrew.williams @ 09:41 AM (6027 views)
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20 Comments

1. bidin'matime said...

It's interesting that no one has commented on this. We've heard it all before - so many times. Most of us have staked our personal financial future on such views. Some of us inherently believe them to be true, but find that we've been wrong so many times, we've stopped expressing our views in polite company.

When is the right time to buy into a bubble? The pressure builds, as more and more of our peers and their families report such wonderful gains from their own 'wise' investments - and regard us and more and more insane for refusing to do likewise.

I recall the dot.com boom of the 1990's. I was a financial adviser at the time, with the task of drawing clients' attention to the gains being made, while also pointing out the risks. I was (and always have been) inherently cautious (and I didn't have a lot of cash to splash about anyway) so I hadn't invested in the boom - until eventually the pressure to do so was too great - and I invested the princely sum of £10k in a dot.com fund. For a few months it soared, increasing something like 25%. Then it crashed - to around 10% of what I'd invested. I held on to it for many years, to see if it could ever recover - before selling for less than £2k about 10 years later.

That memory is what holds me back on property right now. Yes, I know there are all sorts of different factors at play. But that's what they'd said in the very early 1990's - when a single building plot across the road from me sold for 50% more than what I'd paid for my entire house (on a much larger plot) just a few years earlier. I knew then that I should sell up and rent - but we had the children and the idea of 'moving into rented' at that time was an anathema - so we stayed put - and saw our property fall in value - back to what we'd paid for it (including improvements) - selling in 1995 at virtually no gain after 7 years. After 7 years of paying interest at (mostly) double-digit interest rates.

Fortunately, we don’t have to rent – we’ve bought a cheap place (very much ‘down-sized’) so as not to have to – but the big headache is what to advise the children (now in their 30’s and still renting). When is the right time to buy into a bubble? The answer has to be never – but the challenge is knowing for sure it’s a bubble. I’m afraid I’ve given up giving advice on the matter – I know deep down that it can’t carry on as it is, but I no longer have complete confidence that the government won’t steal the rest of our money in an effort to try and keep it going.

Friday, May 15, 2015 07:52AM Report Comment
 

2. taffee said...

http://www.thisismoney.co.uk/money/diyinvesting/article-3070332/Bill-Gross-right-investing-world-s-gone-mad-beware-day-wises-up.html#ixzz3ZSKJ6uPw

You are not alone!....see link above.....there is no doubt this is a speculative bubble which
Like all bubbles will burst...as you say the question is when.

Like the dotcom boom there was a good story behind the madness but ultimately it collapsed
After everyone was on board.when the last bear turns bull.and all that.

One thing is for certain no one was honest about the state of our finances as a country and
The deficit is £90 billion and debt is £1.5 trillion....bond bubble is the one to watch as prices
Fall yields rise and could ultimately force hmg to raise rates...deluded people think hmg
Will bail them out and are interested in their well being....unfortunately they will act in their
Own interests as you saw in the 90s

Friday, May 15, 2015 08:47AM Report Comment
 

3. taffee said...

That's no one was honest DURING the election campaign...Tories said they will cut the deficit to zero by 2017 but expertly managed
To not explain how and our dreadfully weak interviewers let them dodge explaining how

Friday, May 15, 2015 09:07AM Report Comment
 

4. latterdaysinner said...

"When is the right time to buy into a bubble?"

Surely, given the very nature of a bubble, by the time that you realise it is a bubble, it is almost certainly too late. If you thought it was a bubble before, and you still do but with prices now higher, surely it's not a good time to dive in? However, I think a more interesting question is when is it a good time to sell. This question simply isn't relevant for first time buyers right now. For down-sizers though, timing could be important.

Friday, May 15, 2015 09:21AM Report Comment
 

5. mark said...

if you are thinking of selling, the big issue is can people borrow the money to buy, so many people are being turned down at the last minute , I have heard a lot of horror stories of banks refusing to lend to people with 60% deposit, others with less have been accepted then last minute the rug pulled from under them

Friday, May 15, 2015 09:46AM Report Comment
 

6. taffee said...

Property is very illiquid......try getting a good price in a bear market...property can stay unsold for many many
Months if not years....leveraged btl landlords can effectively become insolvent overnight...which is why I just
Don't understand why more are not selling up

Just like the dotcom boom massive demand little supply until it went pop and people selling en mass and little or
No demand....when property goes pop this time it's going to be spectacular imo

Friday, May 15, 2015 09:59AM Report Comment
 

7. quiet guy said...

@bidin'matime

Very much agree with your sentiment. We seem to be stuck in an endless bull market to the point that I have pretty much lost interest in HPC. I am exhausted.

"I no longer have complete confidence that the government won’t steal the rest of our money"

Some of our older readers will remember when high inflation provided an answer of sorts but inflation seems to be almost totally absent now.

Welcome to the great gamble everyone - especially our younger readers! You have to make the biggest financial punt of your life. No choice. Place your chips please or our croupier will do it for you.

Friday, May 15, 2015 11:26AM Report Comment
 

8. letthemfall said...

bidin'matime
That sums up the dilemma. Back in the late 80s it was obvious prices were set to drop, and they did. In 2005 the same was true, then eventually they began to. And then the financial crisis, the collapse of interest rates, and all previous reasoning stopped working. It hasn't started again and that is the problem, and no one knows how long this will continue, especially as govts pretend there is no problem.

Friday, May 15, 2015 12:24PM Report Comment
 

9. libertas said...

Yes it will pop. Most likely in 2026. But it will take folk by surprise because the regulations following 2008 will move financial instability to a new sector. Most likely sovereign debt. The crisis will most likely be student loans, help to buy, Fannie and Freddie may.

Friday, May 15, 2015 12:58PM Report Comment
 

10. libertas said...

Bidin time. You have to factor in the opportunity cost of not renting into your decision about whether to rent or buy. I have done the calculations and have found that there are almost no situations where renting is better than buying in the long term. Where the calculations become tighter are the justification of buy to let over other investments for those who already own a home.

Vs renting, the fact is that most would be better off buying even if house prices fall 3% every year that they own the place. Such is the financial benefit of half your mortgage repayments paying off the principal.

The other issue is that it is impossible to have a good life living off a fixed pension when paying rising rents. Home ownership is simply the bedrock of any pension plan. Even if you only own a small cave to rest your head.

Friday, May 15, 2015 01:02PM Report Comment
 

11. mister ed said...

@1 Bidin'

I can see your dilemma for your kids.

As Libby rightly points out, in the long-term the only sensible option is to buy.

Not that this is a revelation, of course. Everybody knows that.

It's when you start to take those pesky personal factors into account that things become less clear. Some of these personal factors include:

~ Where are they looking to buy? In some parts of the UK, prices are not that high, and buying could make sense. But London? Whoa! Scary Mary!

~ Do they have children? Can they afford to buy a big enough home in a place with good schools? Do they care about good schools? Libby keeps going on about how easy it is to "trade up" to a bigger house/better area, but anyone doing the maths can see this is plainly not true.

~ If they don't have kids, but then plan to have them, will one of the partners stop work to look after them, and will the single income still be enough to cover living expenses? If they can't pay the mortgage, the house is repossessed, and they lose everything, including their deposit.

~ Do they have decent jobs with decent salaries so they can overpay on the mortgage to get themselves out of the "danger zone" as quickly as possible?

~ Do they both work, so that if one person loses their job, they can still pay the mortgage because they have another salary to fall back on? (See note about repossession above)

~ Could they still afford to pay the mortgage on one salary when the kids (if any) get older and household expenses increase dramatically? (See note about repossession above)

~ Could they still afford to pay the mortgage if interest rates rise by 1% in the next ten years. Or 3% in the next ten years? Or even 3% in the next five years? (See note about repossession above)

If they have nice taxpayer-funded government jobs like Libby has, and they can be sure they're safe jobs, and they have a huge deposit, and they can be sure the economic situation isn't going to deteriorate dramatically in the next ten years etc, buying might be the way to go.

Otherwise, it's a case of "decisions, decisions..."

A pain, I know. But that's the way it is. And the list of considerations above is by no means exhaustive.

Of course, another option is to emigrate, providing they have in-demand skills. :-)

Friday, May 15, 2015 02:47PM Report Comment
 

12. i remember the 90`s said...

The bottom line is ,if your renting when retired its going to be grim .

Friday, May 15, 2015 02:59PM Report Comment
 

13. mister ed said...

@12

Aye, especially if it's oop North. :-)

Friday, May 15, 2015 03:27PM Report Comment
 

14. nickb said...

"renting when you're retired"
Well I work in the SE and could afford to buy here if I sunk all my savings. But why do that when I could buy cash in another part of the country that is actually more personable than the SE? ie people actually say hello to each other and are not so obsessed about money and status, with half of them paying rent to the other half. In the NE for example, prices are still falling. So why should I not work out my time in the SE then do a bunk and take early retirement somewhere nice in the NE or Wales for that matter? Why break your balls to buy in the sodding SE?!
N

Saturday, May 16, 2015 03:14PM Report Comment
 

15. cornishman said...

bidin'matime said...
"I recall the dot.com boom of the 1990's. ... so I hadn't invested in the boom - until eventually the pressure to do so was too great - and I invested the princely sum of £10k in a dot.com fund. For a few months it soared, increasing something like 25%. Then it crashed - to around 10% of what I'd invested. I held on to it for many years, to see if it could ever recover - before selling for less than £2k about 10 years later."

I reckon that libby (with his house purchase) is probably currently in the "for a few months it soared" phase - with the rest still to come. He's followed the first part to a tee, having waited so long to buy.

Saturday, May 16, 2015 05:22PM Report Comment
 

16. phils said...

@7. quiet guy - no bull market in most parts of the North where prices are still lower than 2008. So you know where to buy.

Monday, May 18, 2015 09:15AM Report Comment
 

17. Bob Hedge said...

Great thread.

I've read this forum since 2007 when I was looking as a FTB in London, most - if not all here - said don't buy. I scrutinised the best I could as the 'crash' hit (though imo this changed nothing in London), and as someone who just wanted to make a sensible decision I held off buying, stupid move, most things have almost doubled.

It's taken me a long time to realise this country is underpinned by house price growth, or at least 'the look of growth'. I can't blame politics either, it's the culture of owning houses that sprout money - and forums of speculation - that's the problem.

I ended up buying recently and have also given up on caring if it's a good thing or not. The funny thing is that this forum title will end up being correct at some stage with many "we told you so's" to boot, though prices would have claimed 10x since they started posting.

Monday, May 18, 2015 01:47PM Report Comment
 

18. bidin'matime said...

Thanks for all the feedback guys (I'd add 'and gals', but experience on this site suggests that posters are mostly if not all male!)

The problem all along with advising the next generation has been the risk of them buying into an over-priced market, only to see interest rates rise, prices collapse and the nightmare scenario of negative equity and being locked in to SVR mortgages. And the further prices get from incomes, the bigger the risk. But the bigger idiot I look for not having told them to pile in sooner...

I still think that when the shoe-shine boy has a 'portfolio' of BTL properties, it's time to sell - and we passed that point a long time ago...

Monday, May 18, 2015 09:38PM Report Comment
 

19. cornishman said...

bidin, my daughter decided to buy a house in 2008. She was 22 then. I tried my hardest to persuade her not to go through with it, but she is a determined sort of person. She'd seen the gains people had made for the past decade and thought I was being silly advising her not to buy. She paid £125,000. 18 months later a similar house nearby went for £89,000 and, due to a change of her personal circumstances and maybe a little bit of panic, she sold hers for £105,000. She still owes £20,000 (the deposit that she lost) to the person she borrowed it from (not me).

I saw a few days ago that the self same house was put on the market for £136,000. The next day it was listed as under offer.

Like you say, it can't go on. But, in a market rigged by the biggest player of all with unlimited funds, how can you know what to do for the best?

Tuesday, May 19, 2015 08:51AM Report Comment
 

20. mark said...

cornishman - it is very common around my area for house to go under offer then appear as sold before it is passed to a sister estate agency to original agents

this fakery and continual agency switching appears to be a scam to try and get market moving

Tuesday, May 19, 2015 09:34AM Report Comment
 

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