Fundamental Analysis UK Housing Boom – Is the Party Over?

Recently the IMF said that the UK's property was overvalued and this could result in a spectacular slump. House prices in the US have slowed down considerably since 2005.

The UK avoided the Recession in 2001 when many countries went into deep recession. Post 9/11 the UK interest rates were at the lowest for many decades, this resulted in a boom in the UK housing market as the cost of mortgages was at its lowest. The low cost of borrowing also saw a boom in the buy to let market with many investors having a big portfolio of properties.

Not only was the UK government on a spending spree but also the UK consumer, due to the easy availability of credit. Currently the UK personal debt level has exceeded more than £1 trillion. It is expected that we could see a significant rise in insolvencies during 2008. The "time bomb" is ticking and could explode at any time; it could be triggered by any of the shocks to the economy. The Northern Rock fiasco was just the first such trigger, which resulted in savers withdrawing over £14 billion from the ailing Rock - no doubt the next 12 months we will witness more such triggers, which will dent overall consumer confidence. This could eventually lead to a big fall in the house prices.

Many "experts" feel that 2008 could see further rises in house prices, and some optimistic forecast has been put at over a 10% increase. Housing demand is influenced by the "feel good factor" resulting into the expectation that the house prices will continue to rise. Some of the reasons for a boom in house prices are;

• Cheap mortgage rates post 9/11
  
• Availability of easy credit
  
• Speculation of ongoing price increases
  
• Buy to let investors having large portfolio of properties
  
• Amateur investors now joining the buy to let bandwagon
  

The worrying part is when amateur investors join the party; it's likely that we may have seen the peak! One can see similarities with the technology stock boom of 2000. Many investors bought at the peak and after several years they have yet to recoup their losses.

The past year has seen many amateur investors venture into the buy to let market for the first time. This has meant that they have had to buy at the peak, with the mortgage rates almost doubling in the past 5 years.

Currently prices are being supported by the expectations that they will continue to rise, and when this increase fails to materialise the bubble could burst. The house price inflation has been at its fastest this decade as can be seen from the following graph; and since 1995 we have not seen a dip in prices, it has just gone up in one straight line!

In addition, there are other serious issues with the economy which could trigger a sharp correction, not only in house prices but also the stock market. Some of the disturbing triggers will be;</span />

• Lenders offering loans of up to 5 times multiples to salary, thus borrowers are overstretching themselves.</span />
  
• Increases in mortgage rates have yet to have an impact and often this takes time to react. The mortgage rates have nearly doubled since 2002.</span />
  
• Nearly 1 million Britons now own a second home, often as a buy to let investment. When the downturn in economy comes, panic is likely to set in amongst the buy to let investors, which would result in the market being flooded with house for sale.
  
• The US sub-prime mortgage crisis also poses more risks for the UK's banking system. In the US the crisis has lead to plunging property prices, creating a loss of consumer confidence with billions of dollars in loss.
  
• UK Job prospects are worsening, with many economist predicting unemployment to rise to 1.8 million+. The banking & financial sector has been a big driver for employment growth. Many firms in the housing market; this could result into deteriorating earnings and leading to staff cutbacks.
  
• Consumer spending could see a slow down when faced with deteriorating economic and job conditions. Once again this would affect consumer spending, thus lower earnings.
  
• Inflationary pressures are driven by high commodity prices, as demand from emerging economies like India and China continue to increase. This not only has an impact on the monetary policies like the interest rates but will have significant impact on earnings, which could lead to a big fall in stock market.
  

Buy-to-let bubble:
Is the party over? So far the landlords have had it easy, the cheap mortgage rates ensured that the rent covered the mortgage repayments and they benefited from the significant capital appreciation of their portfolio. It surely has been the best investment strategy for the past decade, as many investors have made fortunes and many have "retired" young.

Currently it is estimated that there are over a million buy to let mortgages, and landlords are now feeling the pinch. Past 2 years has seen significant rise in mortgage repayments and we are now seeing signs of price increase slowing down. The rents have not kept pace with outgoings, thus landlord profits have gone down. In some cases landlords are losing on their portfolio. Some areas in the UK have seen an oversupply of buy to let properties resulting into falling yields.

Although year on year prices rose by nearly 5% to December 2007, but the house prices fell for a second consecutive month in December according to Nationwide building society. New mortgages on a buy to let are also slowing, with many lenders now seeking up to 30% deposit and also a requirement that the rent on the property equates to 125% of monthly mortgage payment.

Unless the investor has a larger deposit the rental yield may be insufficient to cover the cost of the mortgage and with no expectations of a capital growth, you are likely to see significant drop in the buy-to-let mortgages. This could even result in many existing landlords starting to liquidate their portfolios. The only incentive to retain portfolios is the expectation of further capital gains. If this expectation evaporates and with falling yield, then there would be no point in buy to let investments.

Newer entrants to the buy to let market could soon face going into negative equity as soon as we start seeing declines in the prices. Furthermore, should the banks suffer to the extent of the housing bust, the fallout would be astronomical!

Changes to the Capital Gains could also contribute to the housing crash. The tax on property gains has been cut from 40% to 18% effective from 1st April 2008. So those investors who are sitting on fat profits would be tempted to lock in gains and also benefit from the lower tax.

Housing Repossessions
2007 has seen a significant rise in home repossessions, and it is expected that this figure will increase considerably in 2008. Rising property repossessions normally spell bad news for the property market creating a supply of houses, which are normally sold below market prices and this can dent confidence.

The Council of Mortgage Lenders (CML) has warned that the number of home repossessions is set to soar to levels not seen since the housing crash of the 1990s. It is also expected that there will be an increase in mortgage repayment arrears in the coming year.

Having said that, the current situation is very different from the 1990s. Firstly in the 90s interest rates were very high and peaked at 16%. We are probably unlikely to see huge scale cases of negative equity like we had in the 90s, due to the huge equity homeowners are sitting on at the moment.

What to do - Action Points?

• If you are a homeowner and if you are contemplating selling your home, then the time to act is now,given that sharp falls may just be round the corner unless the government can delay the inevitable by aggressive reduction of interest rates.
  
• Cash is king - with so much uncertainty, undoubtedly cash is king. Fixed interest and government bonds are increasingly becoming popular.
  
• Stock market investment - Although we have seen healthy gains in the markets worldwide, longer term it offers good opportunity. Many analysts are calling for sharp falls in the markets and this should provide a good opportunity of bargain hunting. Emerging markets should also offer a good opportunity in the event of a market correction.
  

Conclusion
Just as in year 2000, when we saw the NASDAQ stock market boom, we are now seeing some similarities - irrational exuberance in the housing market.

During the NASDAQ boom, we saw many amateur investors jump into the market at the peak, we are now experiencing a similar situation. Many amateur investors are jumping into the buy to let market.

As with all market activity, prices do not go up in one straight line and you will always have price retracement, the question is how big the retracement will be? There is no doubt that a significant house price correction is on the cards, the only question remains is when? It is a case of any one of the triggers to set in - as soon as the first domino falls, panic will set in resulting into significant declines in house prices.

 

[anley]

Yes (some, but very few) fortunes are made in recesions but this housing trade looks a little bit too easy doesn't it.

For example, most people, and not just those on this board are already licking their lips on the prospects of a serious property downturn. 'All we'll do is wait a year (or 2-3) and then buy, then WHEN prices move back up we'll make a fortune'.

Not saying it won't happen but I have a funny feeling that people aren't going to make the money they think they are. What happens for example if property prices don't rise for 5 or 10 years? It's possible, and if it were to happen they'd be another downward leg of selling as the speculators sell out wishing they'd never got involved in the first place.

And you know what would happen next don't you? Yes, a very select number of buyers would start to buy and then prices would start to move higher. So what's happend in reality? Nothing apart from as usual only a very few people make fortunes out of recesions

Be on your guard everyone because still for most people they have the view that you can't really lose with property........

 

[breadman]

anley,
I am looking for the worst to be over by 2012/2015 but it could be 2017/ 2018 or even 2020. It just depends how much it falls between now and then. Even if houses do fall for the next 7 to 10 years every year won't be a down year. The last down turn in the 90's lasted 7 years with a couple of up years and one year which was more or less a flat year in that 7 year down trend.

 

[Trader333]

one guy on the TV being interviwed having over 100 properties was crying cos he had empty properties and that the fixed rates are coming to an end!!! so the mortgages will nearly double!

Well it is now very easy to declare yourself bankrupt and the start again after a year or so. I know of one guy who was made bankrupt in 2001 and by last year had managed to run up £7 Million of new debt on property.

I am looking for the worst to be over by 2012

According to the doom mongers the world will end on Dec 21st 2012 so you will be right


Paul

 

[rols]

Well it is now very easy to declare yourself bankrupt and the start again after a year or so. I know of one guy who was made bankrupt in 2001 and by last year had managed to run up £7 Million of new debt on property.
According to the doom mongers the world will end on Dec 21st 2012 so you will be right
Paul

Time left until The End of The World:

4 years, 6 months, 18 days
1662 days,
143,596,800 seconds
2,393,280 minutes
39,888 hours
237 weeks (rounded down)

 

[anley]

Time left until The End of The World:

4 years, 6 months, 18 days
1662 days,
143,596,800 seconds
2,393,280 minutes
39,888 hours
237 weeks (rounded down)

Be ashame wouldn't it if somebody DID manage to buy a crapload of property on the lows, say 2011, but then just as prices started booming again the world imploded like a neutron star

You can't take your money with ya............

 

[normbeef]

mmm... interesting... even in falling market there are opportunities... the issue at the moment is that "NOTHING" is selling... I have a good mate who is an Estate agent and owns a couple of shops... he has not sold a thing in a month... (get the violins out... )

A moving market is really all we need... at the moment its stuck fast.. there is next to Zero liquidity and people are begining to panic... with only one result !!! downward pressure

realistically we will not return to anything like the lax borrowing we have had for some time to come... the Banks are S*****g themselves so have closed the doors... as long as this remains the case then LOOK OUT... I reckon that nationally we already have fallen 10% another 15 - 20% before any support is due..

A well needed correction yes.... perhaps BUT then again we might just have gone Wylde Coyote style off the edge of the ravine, and we are now doing the old running in the air trick before gravity kicks in..????

 

[rols]

Be ashame wouldn't it if somebody DID manage to buy a crapload of property on the lows, say 2011, but then just as prices started booming again the world imploded like a neutron star

You can't take your money with ya............

Yes you can

The Cryonics Institute Home Page

You'd have to fork out for a spaceship to launch yourself clear of the Earth...
....then just float around for a few thousand years until some kind alien restores you.

 

[2be]

Well it is now very easy to declare yourself bankrupt and the start again after a year or so. I know of one guy who was made bankrupt in 2001 and by last year had managed to run up £7 Million of new debt on property.



According to the doom mongers the world will end on Dec 21st 2012 so you will be right


Paul

I totally agree with you that there are many areas, probably the majority of the country in % terms, that letting is hard, There are however spots that letting is doing well, even now, where the rents are increasing due to demand and the current prices of the properties, where renting is considerred a cheapper option for the time being. Few of the people I know have sold all the property including the one in which they have lived, and themselves are living in the rented accomodation now, hoping to buy later on. As to when, who knows, possibly in a year or two. Majority of the landlords who have in excess of 4/5 properties seem to stay in the letting marked, as they prefer the residual income. IMHO this group in long term shall do better, especially if they are in the areas of highier demand for the rented accomodation, providing they have preserved a high ratio of positive equity in their portfolio. In longer terms it pays to be conservative and preserve the high ratio of equity with fewer properties, than go all the way of expanding without a solid and well astablished fundation. IMO the current situation points to a cyclical nature of the economy, housing market included, rather then interpreting it as a totally new human experience of crisis, when everything must be painted in black.
Times are challenging, so I wish everybody to do the best they can,
2be

 

[anley]

Yes you can

The Cryonics Institute Home Page

You'd have to fork out for a spaceship to launch yourself clear of the Earth...
....then just float around for a few thousand years until some kind alien restores you.

Yes, but make sure your money on deposit at a good rate otherwise you might die with £10million in the bank (in 2012) but in 1500 years time all that will buy you is a packet of peanuts

 

[rols]

Yes, but make sure your money on deposit at a good rate otherwise you might die with £10million in the bank (in 2012) but in 1500 years time all that will buy you is a packet of peanuts

I'd take the money with me on my spaceship - probably a bit of gold, and a few gadgets that might impress aliens. You know - a nasal hair clipper, teasmaid, hair straighteners,
one-remote-for-all etc.

And a copy of The Times from the day I was frozen.....

 

[anley]

Interestingly enough there is a law that states you cannot leave money to a series of relatives to say invest and compound over the years.

For example, you can leave say £1million to your son but he has to leave £500k to his son/daughter (assume here that everyone has kids) and then they leave the £500k (plus profits) to their daughter and so on and so on.

Of course this is always possible to do but you can't put it in your will. What I mean is that they can always leave the money to their children but could you trust your great, great, great, great grandson in about 150 years to do so? That last bit is a messy but I think you know what I mean.

would be funny if this was possible though because there's some stat like if you had £1,000 or equiv in the year 0000 and compounded it at 5% you would have all the money in the world at present.

 

[bhavin]

" Said @ Believe me, there will be a meltdown, a severe one, very bad indeed, the worst is not round the corner, will take 10/15 years from now. The shrewd are already making the plans! "

I may believe you if you provide reasoning as to why what you have said will happen and why it will take 10 to 15 years ?

Paul

Paul - well it is referring to both Economic & Political issues.

In past the europeans ( Also includes all WHITE countries ie USA, CAnada and australia)
maintained supremacy by DIVIDE and RULE! - The current threat to the WHITE countries now come from 2 front ie India and China. India's 2 enemies are China and Pakistan, and these countries are building massive peace building measures!

Remember the 1971 Indo/Pak war - Great Britain supplied Arms to both India and Pakistan!!! - The terrorists in Pakistan has been manufatured by the Europeans.
so that they could fight against the Indians and Russians. How the frankestein has turned against the masters!

The Europeans are now creating jobs in India and China, and this is creating lot of unemployment here! Now these Asian countries are now investing and taking over companies in Europe - so the Investment base is now shifting.

The europeans have pi***sed over th poor blacks, ie the Africans, The Asians are now helping africa grow and be self sufficient, very soon they will stop relying on the the europeans.

The east Europeans will bleed the western economies! - look at the millions of pounds of benefits being claimed by these nations! How can the West sustain it when the revenues goes down ( ie tax income) unemployment goes up ( meaning more benefits for locals)

Emmigration of the rich - this will be a brain drain, and many rich are already setting up base abroad, and many are doing in Asia.

What about the Dollar - we all know about the crap paper, worthless, the Asians are supporting the Euro and Dollar, very soon there will be an alternative, give it 10 years. You will have the Rupee and Yuan and maybe the rouble!
The africans and arabs may stop using the dollar and euro

so in a nutshell europeans have had it easy! no oil, no diamonds, no uranium, no agriculture, no gold!! - All they have is the paper, worthless dollars and euros, which the africans and asians are using!

Basically the europeans are rich because they have been stealing from the poor! -

So it will take 10/15 years for the asians and africans to take over, and the europeans will be slaving up to these @poor@ nations of today

 

[Atilla]

" Said @ Believe me, there will be a meltdown, a severe one, very bad indeed, the worst is not round the corner, will take 10/15 years from now. The shrewd are already making the plans! "

I think you are getting carried away. Adjustment by all means and perhaps a deep and prolonged one max 3-5 years. You are running away with your self on the 10/15 imo.

Paul - well it is referring to both Economic & Political issues.

In past the europeans ( Also includes all WHITE countries ie USA, CAnada and australia)
maintained supremacy by DIVIDE and RULE! - The current threat to the WHITE countries now come from 2 front ie India and China. India's 2 enemies are China and Pakistan, and these countries are building massive peace building measures! Very true and I concur 100%

Remember the 1971 Indo/Pak war - Great Britain supplied Arms to both India and Pakistan!!! - The terrorists in Pakistan has been manufatured by the Europeans.
so that they could fight against the Indians and Russians. How the frankestein has turned against the masters!

The Europeans are now creating jobs in India and China, and this is creating lot of unemployment here! Now these Asian countries are now investing and taking over companies in Europe - so the Investment base is now shifting.
Multinational phenomenon is not new. Whee you have free movement of capital and labour that's what happens. You need to bear in mind India and China will be spending their monies on European goods and products also. Beauty of perfect competition and economics is that the greater the velocity of money the better off everyone is. If you think China and India will be able sustain the fledgling economies without the purchasing power of Europe and US you are making a mistake imo. The Asian markets will be tested after the olympics imo.

The europeans have pi***sed over th poor blacks, ie the Africans, The Asians are now helping africa grow and be self sufficient, very soon they will stop relying on the the europeans. The Europeans and the US **** over everyone mate. It's called capitalism. In the industrial revolution the great British manufacturers used to use 4 year old kids to go into coal mines through little tunnels because their bodies were small enough to get through. The labour unions got badly screwed in the US along with any other foreign national. Beatings, killings and low pay were just a facet of life. The same and worse is happening in China and India. All that popullation working for peanuts. I think you are getting carried away with some proud nationalism but don't let capitalism colour your judgement imho. All humans are greedy *******s and there are very few decent people out there...

The east Europeans will bleed the western economies! - look at the millions of pounds of benefits being claimed by these nations! How can the West sustain it when the revenues goes down ( ie tax income) unemployment goes up ( meaning more benefits for locals) Not true. East Europeans are hard working humans and they provide cost effective labour and a bigger market place so Europe can replicate the same kind of scenario as India and China. Labour is labour. It's quality is determined by how much capital and technology it has to work with at what price.

Emmigration of the rich - this will be a brain drain, and many rich are already setting up base abroad, and many are doing in Asia. True. I'm all for free movement of labour and global humanity. I'd scrap national borders altogether and have one global system. We just need to find some aliens so we can as humans can all unite againts some other superhuman or subhuman enemy...

What about the Dollar - we all know about the crap paper, worthless, the Asians are supporting the Euro and Dollar, very soon there will be an alternative, give it 10 years. You will have the Rupee and Yuan and maybe the rouble!
The africans and arabs may stop using the dollar and euro True. We need some new strong reliable currency. Euro has my vote. Rupee and Yuan have to prove them selves first. I'd give them another 20 years first.


so in a nutshell europeans have had it easy! no oil, no diamonds, no uranium, no agriculture, no gold!! - All they have is the paper, worthless dollars and euros, which the africans and asians are using! If demand for oil, diamond and gold stops you'd soon see some major adjustments. Don't forget some new creative destructive technology to kill off demand for these products all together. If you are in the desert which would you prefer, diamonds or water?

Basically the europeans are rich because they have been stealing from the poor! - True to some extent, but they are also more productive with better education and more capital technology and resources to work with. Look at the number of patents registered. People in poor countries sit in the shade watching sand blow over their toes. Give some credit and recognition to the wealth and technology created in the last 100 years.

So it will take 10/15 years for the asians and africans to take over, and the europeans will be slaving up to these @poor@ nations of today You wish... Just remember these nations are not likely to be any better but just as bad as the Europeans and US. They could be a lot worse too.

Whilst I concur with your analysis of the past I'm not sure about your analysis of the future.

I'm thinking these countries are coming into the industrial revolution when economies of scale and exhaustion has kicked in.

In developed countries money may not even be required in a pure service industry. People will vacate metropolitan cities and move back into living off the land.

Developing countries will lose their classical extended families and go through pretty much the desease we find our selves infested with too much material and no spiritual enlightenment or happiness, broken families and beraucratic mechanisation of the soul to institutions.

Gloat away if you like but becareful what you wish for...

 

[Marwan2010]

Hey Bhavin, nice reasoning on why it would take 10/15 years, and nicely debated by Atilla. Whilst I can see the inevitable happening, ie the shift in the power from West to East, but it will not be that instant, i think it may well take a century or so.......................

The east simply do not have an Infrastructure in place, yes India can be a global power, but it is still a long way to go. yes there are many billionnaires in India then any places in Asia, but also lets face it there is lot of poverty. Millions go to bed without food, without water. It is a fact!

Also India is probably one of the most corrupt nations on earth. Did you know of a fact that Indians have more money stashed up in the Swiss bank accounts then the ENTIRE world put together!!!!

Not to forget that the left wingers have a great hold on the politics of India, A diverse culture, and continued communal clashes between Hindus and Muslims....
The list is endless......................

well, whilst I think the shift "may" occur, but it is a long long long way...................

where are my loyalties? My roots are from Middle East and Subcontinent, but my bread comes from "GREAT BRITAIN" so my prayers are with UK AND ITS Prosperity!

Yes there will be a Crash in the property market even a meltdown, but as always it will emerge as strong - it will be just an opportunity to buy, and the prosperity will return.

PS - where is your loyalty? India or Great Britain?
Have you passed the TEBBIT test? who do you support in cricket when there is a test match between India Vs England

 

[thomasz1]

this is a article good, I will send email to you.

 

[Marwan2010]

Also India is probably one of the most corrupt nations on earth. Did you know of a fact that Indians have more money stashed up in the Swiss bank accounts then the ENTIRE world put together!!!!

just did some reasearch on the web, Indians have over $ 1.4 TRILLION dollars in teh swiss banks. It is probably the biggest loot ever seen by the whole mankind! Bulk of this is by the politicians!

Just what can they do forthe country when they loot the nation, and the millions go hungry in India.

well, i guess it is long way to go before India can trully become a superpower!

 

[Atilla]

just did some reasearch on the web, Indians have over $ 1.4 TRILLION dollars in teh swiss banks. It is probably the biggest loot ever seen by the whole mankind! Bulk of this is by the politicians!

Just what can they do forthe country when they loot the nation, and the millions go hungry in India.

well, i guess it is long way to go before India can trully become a superpower!

What % of this stash is from India?

Lots of rich Indians abroad earning income abroad as well as donations placed by foreign multinationals to gain favourable contracts in India.

As wealth generation goes it's questionable. To me it says they obviously don't know something that the oil generating countries do. :whistling

 

[breadman]

sales of houses are at the lowest since 1978 with estate agents selling only 17.5 houses in a 3 month period, lower than the 1991 average of around 26 per 3 month period.
Rates in the swap market where banks borrow to fund fixed-rate mortgages jumped yesterday. Those used to fund two-year mortgages rose from 6 per cent to 6.3 per cent,
it was the biggest one-day increase since 1992.

 

[Marwan2010]

What % of this stash is from India?

As wealth generation goes it's questionable. To me it says they obviously don't know something that the oil generating countries do. :whistling

the trillions were from India! - bunch of crooks,
Guess they cant do what the oil countries do, cos the loot they have in Swiss banks is looted and governed by the secrecy!

wish they would give it to me! I would double it every 3 years!

 

[Marwan2010]

sales of houses are at the lowest since 1978 with estate agents selling only 17.5 houses .

interesting read!

Bloomberg.com: Worldwide

``If transactions remain 50 percent lower than they were last year this has real repercussions for the wider economy,'' Simon Rubinsohn, chief economist at RICS, said in an interview with Bloomberg Television. ``It's still pretty scary stuff.''