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!

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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.
 
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please tell where these foreign buyers are because I don't see demand reflecting your hypothesis. Your prognostication lacks tangibles
 
please tell where these foreign buyers are because I don't see demand reflecting your hypothesis. Your prognostication lacks tangibles

If you say so... :)


I don't have hard facts. Let's say it is my perspective or impression of what I see and experience. I would not term it hypothesis. That's somewhat obtuse. I would simply call it my informed opinion.

What % of London or Brighton is foreign? I don't know but I do know foreign lingo when I hear it. Even Worthing is full of foreign students.

Markets and global economies are poised for inflation infested recovery very soon.


Interesting statistics on what people predicted and what has transpired... Long table best read bottom up...

http://www.housepricecrash.co.uk/#statistics
 
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Look forward to reading it in the morning while the wife is making me breakfast in bed.
 
please tell where these foreign buyers are because I don't see demand reflecting your hypothesis. Your prognostication lacks tangibles


Hi Forker,

I work in Hong Kong for a firm that develops and sell property just in Cetral London with the odd development on the outskirts of London. Chinese buy our properties as well as Arabs and we have Russians as they are sold through agents in all these areas. Something to consider is that expats in HK are extremely well paid and most are purchasing property like there is no tomorrow, why, because the are getting 4% to 6% returns plus leveraging their deposits with mortgages. Also many place these in a BVI company wrapper which is held in a trust so they dont have any Inheritance Tax and their offspring get to keep the whole investment.

This is what is keeping the London market up and why your not seeing any real movement in the rest of the coutry. Attila is also right as the Chinese are buying with a view to their children and friends children sudying in the UK.

Ged
 
Hi Forker,

I work in Hong Kong for a firm that develops and sell property just in Cetral London with the odd development on the outskirts of London. Chinese buy our properties as well as Arabs and we have Russians as they are sold through agents in all these areas. Something to consider is that expats in HK are extremely well paid and most are purchasing property like there is no tomorrow, why, because the are getting 4% to 6% returns plus leveraging their deposits with mortgages. Also many place these in a BVI company wrapper which is held in a trust so they dont have any Inheritance Tax and their offspring get to keep the whole investment.

This is what is keeping the London market up and why your not seeing any real movement in the rest of the coutry. Attila is also right as the Chinese are buying with a view to their children and friends children sudying in the UK.

Ged


Long time no hear mon ami. So that's where you have dissappeared to. Good move I can hope. :)


I can also add one of our technical support chappies is a Belgian graduate. Was on the same course with him. His dad paid University fees of £16K p/a to have him educated here in London. Really nice hard working lad. He is employed by an Italian company in London.

London and UK universities still have pulling power.

I also think if £9K cannot be met by local students I'm sure universities will be looking to fill places with international students.


This migration and proximity to Europe I'm sure would go a long way to explain prices in London and SE.
 
Long time no hear mon ami. So that's where you have dissappeared to. Good move I can hope. :)


I can also add one of our technical support chappies is a Belgian graduate. Was on the same course with him. His dad paid University fees of £16K p/a to have him educated here in London. Really nice hard working lad. He is employed by an Italian company in London.

London and UK universities still have pulling power.

I also think if £9K cannot be met by local students I'm sure universities will be looking to fill places with international students.


This migration and proximity to Europe I'm sure would go a long way to explain prices in London and SE.

Hey Atilla,

Hope all is well. Yeah i think thats why the government has latched onto the big tuition fees as over here and on the mainland UK University tuition is seen as one of the best. Also the kids can then come back here as more cultured and fit in to the expat companies better which gives them a leg up as they understand the western culture better which helps their carriers. HK Chinese see the mainlanders as uncultured so the mainlanders try hard to westernise and hence a lot of Chinese in UK universities.

PS. Hong Kong is a fantastic place to live. :):):)

Had a wife when i came here and now i havent. :cheesy::cheesy::cheesy::cheesy::cheesy::cheesy: Its got even better.......

Ged
 
Hey Atilla,

Hope all is well. Yeah i think thats why the government has latched onto the big tuition fees as over here and on the mainland UK University tuition is seen as one of the best. Also the kids can then come back here as more cultured and fit in to the expat companies better which gives them a leg up as they understand the western culture better which helps their carriers. HK Chinese see the mainlanders as uncultured so the mainlanders try hard to westernise and hence a lot of Chinese in UK universities.

PS. Hong Kong is a fantastic place to live. :):):)

Had a wife when i came here and now i havent. :cheesy::cheesy::cheesy::cheesy::cheesy::cheesy: Its got even better.......

Ged


Wow - young free and single again (y)

Well that's all where it is happening I guess. Sounds like a good move.

We'd like to move to somewhere in Italy but I think it's still some way off. We are in the dreaming phase at the moment.
 
Wow - young free and single again (y)

Well that's all where it is happening I guess. Sounds like a good move.

We'd like to move to somewhere in Italy but I think it's still some way off. We are in the dreaming phase at the moment.


Just go for it mate. Whats the worst as you can always move back if it
doesnt work.

Ged
 
"House prices are currently around 12 per cent higher than the lows seen in the midst of the financial crisis," said Robert Gardner from Nationwide!

Looks like the party is about to start?
 
More lambs to the slaughter.

Interest rate rises will come as a shock to all of these people and I think by the time the MPC reacts to inflationary pressures it will be too late and they will have no choice but to increase rates in ever widening steps really hurting the pockets of the already over-borrowed public.

However I don't see this happening in the next few years - so let them enjoy the party for now.
 
More lambs to the slaughter.

Interest rate rises will come as a shock to all of these people and I think by the time the MPC reacts to inflationary pressures it will be too late and they will have no choice but to increase rates in ever widening steps really hurting the pockets of the already over-borrowed public.

However I don't see this happening in the next few years - so let them enjoy the party for now.

Valid point!
but the way things are properties are in short supply
and with the economy in a ****, highly unlikely they will raise interest rates
with elections in 2 years, they will do anything to prop up the market
 
More lambs to the slaughter.

Interest rate rises will come as a shock to all of these people and I think by the time the MPC reacts to inflationary pressures it will be too late and they will have no choice but to increase rates in ever widening steps really hurting the pockets of the already over-borrowed public.

However I don't see this happening in the next few years - so let them enjoy the party for now.


You still playing it down Hoggums :|

There is a housing supply shortage in the UK. Mass influx of not just migrant labour but also foreign students and businessmen. There are also investors who are coming in buying low with a view to killing on rising prices and strengthening pound.

Government not only helping first time buyers by guaranteeing mortgages, they have relaxed building regulations to expand on existing properties.

Whilst the green belt and Permitted Developments rules are in place the housing shortage will continue.

Go with the trend Hoggums, go with the trend. ;)
 
I am coming in a much lower level of knowledge, so bear with me...

With this "Help to Buy", with the government giving interest-free money for a couple of years to help people onto the property ladder, what happens after the 2 years is up, and the hapless home-owners have to pay the extra interest?
I mean, if they can't afford it now, why should they be able to afford it in the future?

And another thing, with around 1million on "zero-hour contracts", ie, no guarantee of work, how do lenders decide to lend, as the income of such people is zero, as they are not on a salary.

EDIT: I am long on handcarts, and investing in toll roads to Hell.
 
I am coming in a much lower level of knowledge, so bear with me...

With this "Help to Buy", with the government giving interest-free money for a couple of years to help people onto the property ladder, what happens after the 2 years is up, and the hapless home-owners have to pay the extra interest?
I mean, if they can't afford it now, why should they be able to afford it in the future?

And another thing, with around 1million on "zero-hour contracts", ie, no guarantee of work, how do lenders decide to lend, as the income of such people is zero, as they are not on a salary.

EDIT: I am long on handcarts, and investing in toll roads to Hell.

I think these days mortgages are cheaper than rent.

In another two years people will have jobs and the economy likely to be in full flight. Like 1929 is history so will this recession.

On the economic cycle I guesstimate the next time we'll see anything like the last 5 years will be around late 2030s early 40s. Until then let the good times roll. (y)
 
All this money people are borrowing to buy these increased house prices has to be paid back. Where is it going to come from? They can service the debt now while interest rates are at 0,5%. But what if the interest rate rises 8x to 4%? The only answer is to increase their wages to cope, but that means there's more money about - people will buy more stuff - prices will go up in response - and before you know it we have even more inflation and even higher interest rates.

The help to buy scheme is no such thing. The government is simply allowing people to buy houses they can't afford.

All this talk of a housing shortage meaning prices will continue to rise is nonsense. If people can't afford a house - then there's no demand at higher prices and therefore the prices cannot rise beyond a certain point in relation to wages. It's simply low interest rates and reckless lending that's still going on that is propping up the market. in order for house prices to increase, wages go up - and as I've explained - then so does inflation and interest rates.
 
All this money people are borrowing to buy these increased house prices has to be paid back. Where is it going to come from? They can service the debt now while interest rates are at 0,5%. But what if the interest rate rises 8x to 4%? The only answer is to increase their wages to cope, but that means there's more money about - people will buy more stuff - prices will go up in response - and before you know it we have even more inflation and even higher interest rates.

The help to buy scheme is no such thing. The government is simply allowing people to buy houses they can't afford.

All this talk of a housing shortage meaning prices will continue to rise is nonsense. If people can't afford a house - then there's no demand at higher prices and therefore the prices cannot rise beyond a certain point in relation to wages. It's simply low interest rates and reckless lending that's still going on that is propping up the market. in order for house prices to increase, wages go up - and as I've explained - then so does inflation and interest rates.

One group will always benefit at the expense of another, but this is obscured by economic reporting. High house prices provide zero economic benefit to an economy.
 
House prices to rise £33,000: Property boom shows no sign of slowing | UK | News | Daily Express

interesting article!
@A 13 per cent rise would add nearly £33,000 to the asking price for a typical home.@"
so when panic sets in, people will be fighting to buy the houses

That's hilarious...as if the average Brit is sitting on mountains of cash just waiting for the right time to buy :rolleyes:

I don't know what planet Nationwide is on, but I've been keeping a close eye on property prices in my area for the last 4 years and prices have been stagnant. People in the U.K are broke, just like the Government.
 
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