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;

  • Lenders offering loans of up to 5 times multiples to salary, thus borrowers are overstretching themselves.
  • 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.
  • 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.

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.

Jay Lakhani is a professional trader and has been involved with the markets since his early twenties. He is also the author of a book entitled: ‘Forex Mastery a Child’s Play’ which is a 307 page paperback outlining simple trading strategies and focuses on trader psychology. Jay also runs a live trading room, where traders are able to watch over his shoulders and see what he is trading.

Jay Lakhani is a professional trader and has been involved with the markets since his early twenties. He is also the author of a book entitled: &lsquo...


8,658 984
I am not sure that I agree with all of this article. I can see that repossessions will increase and that prices may fall but a couple of factors are missing from this article that will have an effect on all of this. This is the fact that the UK population is growing a lot by immigration and is expected to continue much faster than original government estimates and these people need housing. The second is that in London property is being bought up by Eastern Europeans and at a quite alarming rate. The key issue being that in certain areas demand is still greater than supply and as London is the centre for all pricing origin of housing throughout the UK then it is entirely possible that we wont see the apocalyptic crash that everyone else is predicting.

The other consideration is that when the Buy to Letters start jumping ship those with cash can walk in and take over and there is a lot of cash about with certain people. I know quite a few who are waiting to pounce if and when the decline happens. People have to live somewhere and if it is not in their own house then it has to be rented and in my view the demand for rented property is likely to go up not down.

But who knows this is just my view and I know that anyone who attempts to predict the economic future is almost always, and without exception, invariably wrong.

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Depth Trade

Experienced member
1,848 98
Not only is the party over, but all the beer is gone and so is your girlfriend!

I couldn't agree more with the articale in relation to the USA market. We are done. We're talking bank runs and bread lines. The Dollar index is currently recording a price of 76.5dx 82.61ux, but if you cross reference the prices with global product pricing, the actual value of the USD is 0.9260

Ok, do you understand this? The price of Gbp is about 1.9502, the price of Cad is 0.9735, the price of Aud is 0.8732, the price of Chf is 0.9106

What this tells us is that most currencies are trading around parity, but the price of USD is over valued by a factor of 8161% OK, we have borrowed so much more than our net worth that the dicreptancy shows up in the cummalative USD pricing.

Ok, let this sink into your head. Most currencies trade around parity, USD is at 76.2 the price of USD is going to plummet untill it reaches parity then adjust from there.

All that talk about martial law and a USD collaspe is very real. Americans are to stupid to quantify the situation or intelligent to even care. We're losing 20% of USD value every year and this isn't even calculating the balance sheets.
There are rumors that 50% of our most reputable banks are already defaulting on loans, but this hasn't affected us yet because there being bailed out by foreign banks.

We're already collapsed, if the majority of Americans had a clue what was going on theysay the grocery stores would be cleaned out in a matter of days. Holdings in Silos is down by 11% this year, not to mention a bad harvest last year along with even lower Silo holdings from the previous years.

All those rumors about FEMA concentration camps are true. They have camps built for when the bank runs start and after food has been cleaned off the shelfs.

Alot of conspiricy buffs think there is a NEO-con power play 'playing-out', but what these 'buffs' don't understand is that if the economy collapsses, there won't be any food or money. This whole consolidation of power isn't happening just for the sake of Control, but for the fact that Americans are not prepared for this type of event and even trying to prepare the population for this type of event would make it happen that much faster.

There is only a limited amount of resources to prepare people.

The day that America relaxes on it's military posture is the day that our dollar ultimately plummets and people will see no value in America, only risk.

Why would some one invest in the USA when China, Singapore, Hongkong, Russia, Mexico all have better standing Balance Books.

You'd have to be a complete idiot to invest large amounts of money in this country.

As an American the smartest thing you can do is attempt to remove all your capital and convert it to metals and hold it in a bank vault or Safe at home, because I guarantee by the time reality hits you won't have anywhere or any product to put it in.

All the data being released is scewed, the actuall unemployment rate is closer to 12% then the recorded 4%, there total liars.

We're about to enter a nightmare here in America. The NAU is going to try and take over the USA thanks to there manifested collapse. There is going to be so much confusion that the safest place to be will be 'out of the markets'.

Anything USD based is worthless. Sell your stocks, sell your bonds, get rid of your dollars.
All your money is going to be locked and regulated after the collapse.

In fact there going to try and get rid of actaul money in a few years, if you think it's hard to have actuall assets, you havne't seen anything. They want to convert all you money in to credit, instead of having 400k to you name, you'll have 400k Credits to your name and you won't be able to withdrawl it all at anytime. They'll want to know where it's going (terrorist), why you need it and time lines to when it will be available.

And if you are delayed in making a payment, you whole account will be locked.

This is no B.S.

I have more to say, but need a break.

Don't trust your goverment.



Legendary member
5,524 643
Paul, how can the Eastern Europeans afford London property? I thought they were poor people and coming to this country looking for work, happy to work below minimum wage?


8,658 984
There are a lot of very rich ones around and they are buying multiple properties, mostly Russians.



Legendary member
5,524 643
Ah! I was under the impression that all the foreign money was now "in cash", waiting for the impending crash, before buying it all back.

Justin Thyme

9 0
There aren't very Eastern Europeans with sufficient funds to make any real dent on the London Property market. Most of these people are here to make some money and then scoot off home with enough to buy a property in their own country.

The best guage of what's going on is a look out of your own window. Where I live in West london there was a time not so long ago where you couldn't go for 5 minutes without seeing one of those Foxton's Estate Agents-branded Mini Coopers running around on viewings. Now, you'll be lucky if you see one a week. The market's on its knees.

No potential buyer is going to pile in until they believe the market has reached or is within striking distance of the "bottom". I mean, would you buy a £500K house today with, say, 5% knocked off when if the papers are to be believed, you'll be able to get the same place for £450K or £400K next year ? No, neither would I.

Any Russian with lots of money would probably realise that London's had its day and that Hong Kong and perhaps, germany are the places to be in at the start of a boom.


Active member
111 10
Very true. I set up a removal and storage company in London 8 years ago and have been lucky with timing.

Things are slower than ever. Not just for us but everyone I speak to in the business. Also, we carried out stacks of removals for Foxtons until September last year when I told them we would do no more as they owe us a small fortune. We are now in the process of taking them to court.

The owner sold out for around 400 mil last year to a private equity company. Very clever man as he called the top and kept the lease of his prime locations so even if Foxtons went tits up he will have his property to fall back on ( just in case he loses his millions spreadbetting ).


Experienced member
1,608 102
I am always sceptical of any so called Pundits predicting doom and gloom......sorry no disrespect to Jay...

I remember Jupitar Effect when whole world was going to end and I was very sad that I might never get to own a house or have my own car etc etc....

I have more that I dreamed then.....

Just read all and do what your learned decisions says...

After all you are all traders, intelligent and street wise.

You don't need anyone saying things otherwise....

Be cautious, but also be brave in taking decisions....After all fortune favours brave and Nothing ventured, nothing gained are my mottos...!

I am certainly NOT worried in this spate....It is not fundamentals, but panic and sheep mentality that is deciding the markets.

If I had followed the predictions in 90's, I would have remained a single property owner....
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Active member
161 12
Interesting article.... I can see some logic behind the reasoning on this. yes i have seen many jump into the buy to let bandwagon, the yield are not great, and I am sure you can get better investment returns elsewhere. Crash! I doubt if it will come, but a correction yes, it is on cards. I am looking to sell my buy to let portfolio, and get back in 2/3 years time!

i can see banks getting in trouble and yes the personal debt is up........ and going up! so really it is all common sense - prices do not move in one straight line.


1 0
I agree to some extent with the author, however I believe the UK situation is different to US. The housing market in UK is sustainable. Yes the growth in London will slow down or there may be a correction in the near future, however in the long run property is the best option.


Active member
161 8
Have a look at this video;

Yanks being paid to vacate their homes! Well London is not far and then the rest of the world. Is the picture gloomy!

Yes it is. The Party is surely over. Agree with some comments that property and shares are all long term investments, but it is all about timing. You dont buy at the peak.