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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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.


Not disputing the economics Hoggums and what NT says is also true.

However, G guaranteeing mortgages is to facilitate extremely risk averse banks to start lending again. Like guaranteeing export payments.

House prices increases are no benefit agreed but the frequency of exchange coupled with the multiplier of other transactions a house purchase generates is good for the economy. The exchanges need not be at higher prices but confidence brings about increased purchases and thus economic activity.

Finally, I'm only a player in the market. Personally, I'm more into eco-builds and going off-grid hugging trees to be honest. I do think house prices are way over priced. Not sure why people feel the need to buy such big, ostentatious houses and then choose to spend 10 hours at work paying for them. But that's life as we know it for quite a few people... :)
 
> London prime properties are up nearly 60% in past 10 years, and that is an amazing growth as rich overseas buyers are snapping em.
> Construction activity is 40% below average, so no new homes are being built
> BTL investors are snapping up anything that comes to market, as with increasing rent yields and low interest rates, with so many tenants on the F***** housing benefit, this will be a good growth industry
> Election - They need to win again, so they will create a "feel good factor", unfortunately electorate have "tiny" memories, so the buggers will do anything to prop up the market

So to conclude, after the win the election, they will raise interest rates, but by then the economy will have started to motor up.

So with this data, a housing crash is unlikely!
 
Party looks like it's set to continue on easy money...

The post BoE-Carney FG/MPC statement 'stewards enquiry' is ongoing. Both UK asset classes continue to swing about wildly as players decipher whether the sell-off(s) were a bit rash on known facts/rhetoric. Certainly, rebounds suggest this may have been the case but the angst at the time was warranted on (so many) caveats, KO's and provisos = uncertainty. Still, [GILTS] clawed back more than 1/3pt at one stage but currently trade 110.90-00 (-2/5pt) in still jumpy markets & remain underperforming [BUNDS]. The EZ benchmark is more or less flat, last at 142.10 hence the 10Y yield gap is out to 82bp (almost a 3yr wide). The battered [SHT STERLING] strip struggles to rebound by the same degree and is 1-10 ticks offside in 2014-15 contracts vs +13 ticks on the initial policy headlines - ie tied to 7% u/rate and not seen falling below until 2016.


Perfect timing - superb speech well delivered imo. (y)
 
> London prime properties are up nearly 60% in past 10 years, and that is an amazing growth as rich overseas buyers are snapping em.
> Construction activity is 40% below average, so no new homes are being built
> BTL investors are snapping up anything that comes to market, as with increasing rent yields and low interest rates, with so many tenants on the F***** housing benefit, this will be a good growth industry
> Election - They need to win again, so they will create a "feel good factor", unfortunately electorate have "tiny" memories, so the buggers will do anything to prop up the market

So to conclude, after the win the election, they will raise interest rates, but by then the economy will have started to motor up.

So with this data, a housing crash is unlikely!

> Looks like Carney was reading T2W forum! lol,

Bank of England governor Mark Carney has said the Bank will not consider raising interest rates until the jobless rate has fallen to 7% or below.
 
Party looks like it's set to continue on easy money...

The post BoE-Carney FG/MPC statement 'stewards enquiry' is ongoing. Both UK asset classes continue to swing about wildly as players decipher whether the sell-off(s) were a bit rash :

I often fail to understand these WILD swings!
who is causing it?
surely not traders, cos I am sure they are not putting big buy or sell orders

OR

Is it market makers, to shake off weak players?
anybody has any ideas?
 
"Homeless charity Shelter said house prices were so high that on average it takes a couple with a child up to twelve years to save for a deposit. Parents across the country are contributing £2 billion a year to their children's house-buying fund."

If there is NO FTB then there is NO housing market! simple!

A crash will happen, even if it is after the elections!
you cannot f*** up with the markets, and soros proved it.
Eventually there will be a catch up, and the market forces will win.
 
"Homeless charity Shelter said house prices were so high that on average it takes a couple with a child up to twelve years to save for a deposit. Parents across the country are contributing £2 billion a year to their children's house-buying fund."

If there is NO FTB then there is NO housing market! simple!

A crash will happen, even if it is after the elections!
you cannot f*** up with the markets, and soros proved it.
Eventually there will be a catch up, and the market forces will win.

I thought we had the crash in the last five years. Biggest ever!

You waiting for an even bigger one? :-0

Some people were predicting even a 50% house price crash. As it happens it has been a bit of a damp squib really. I'm sure some people will bark on about fiat currencies and their demise at the printing presses but bricks and mortar and land is cool in my portfolio.

Catch the wave and ride it. Hands up in the air and wave them as if you don't care :clap::clap::clap:

Next BIG crash due late 2030s. :whistling
 
I thought we had the crash in the last five years. Biggest ever!
You waiting for an even bigger one? :-0
Next BIG crash due late 2030s. :whistling

Yes I am expecting a mega crash, what happened in the last 5 years was just a minor tremor! but it will be 18 months after the elections. For now I am invested in properties. Bought few run down flats last year, already showing near 20% gain.
will start to liquidate as from 2015 onwards
 
How can there be any crash when the demand is outstripping supply and by a large amount ? Most of London is being bought up by foreign cash and this has the effect of moving the prices rises up out of London as well. It is easily possible now to commute to London in under 90 minutes and live over 150 miles away and people are doing it.

I agree that FTB cannot get on the ladder but that doesn't mean that those with equity in their property will suddenly decide to lower prices. In my view the only thing that will possibly cause a crash is an increase in interest rates. That is because so many people are on a knife edge with monthly costs and there has been no increase in salaries over the last few years that any increase in mortgage payments will send them over the edge.

It is also interesting to see that a significant number of people taking out payday loans are professionals such as doctors, lawyers, dentists, teachers etc and that in itself shows how fragile finances are for a very large section of the population.

I also doubt the Tories will win the next election as their vote will be split between UKIP and Tory which will kill all their marginal seats. Labour will win easily by default as a result of just that alone in my view unless something quite dramatic changes things.
 
It is also interesting to see that a significant number of people taking out payday loans are professionals such as doctors, lawyers, dentists, teachers etc and that in itself shows how fragile finances are for a very large section of the population.

If that's true -- and I have no evidence to contradict it and would be interested to know the basis for this argument -- then it is very significant.
 
How can there be any crash when the demand is outstripping supply and by a large amount ? Most of London is being bought up by foreign cash and this has the effect of moving the prices rises up out of London as well. It is easily possible now to commute to London in under 90 minutes and live over 150 miles away and people are doing it.

I live about 40 mins out of kings x by train and all the houses round here are getting snapped up pretty quickly, mostly by landlords wishing to rent them out (not a bad thing in my view, dont' see why everyone needs to own a house).
 
If I were younger I would borrow every penny I could get my hands on and buy property in London ...........you have a government intent on propping the market up no matter what.......(forget Carneys employment comment .........hes here to keep property markets high)

Property is the barometer for the British people and everyone watches it like a hawk.........."my home is my castle" is definitely the feeling as much today as it has ever been and its the feelgood factor that every politician knows he must not tamper with .........or he will not be in government for long (Cameron knows the score)

I lost a lot of money on a newbuild during the last price fall but that was my stupid fault buying at the high and needing to sell it ...............most people are not out of pocket now vs 2007 prices which is astonishing verses the US performance and other countries demises .........

so its full steam aheads and fill you boots ...........still buying sensibly of course !

N
 
How can there be any crash when the demand is outstripping supply and by a large amount ? Most of London is being bought up by foreign cash and this has the effect of moving the prices rises up out of London as well. It is easily possible now to commute to London in under 90 minutes and live over 150 miles away and people are doing it.

I agree that FTB cannot get on the ladder but that doesn't mean that those with equity in their property will suddenly decide to lower prices. In my view the only thing that will possibly cause a crash is an increase in interest rates. That is because so many people are on a knife edge with monthly costs and there has been no increase in salaries over the last few years that any increase in mortgage payments will send them over the edge.

It is also interesting to see that a significant number of people taking out payday loans are professionals such as doctors, lawyers, dentists, teachers etc and that in itself shows how fragile finances are for a very large section of the population.

I also doubt the Tories will win the next election as their vote will be split between UKIP and Tory which will kill all their marginal seats. Labour will win easily by default as a result of just that alone in my view unless something quite dramatic changes things.

100% agree ..............but look at the governments interventions from 2008-2011 when they told banks not to REPO...........or else

also the banks know they will then generate a Real collapse if this happens so will probably accept defaults vs putting unrealised losses on their balance sheets....for a few years anyway ....

N
 
Ftb interest rates are artificially lowered from market rate as >25% is interest free for 3-5 years. When that piper has to be paid, if the economy and real wages haven't picked up I'm expecting to see more from the supply side.

think this talk if a crash is a nonsense though atm.
 
I live about 40 mins out of kings x by train and all the houses round here are getting snapped up pretty quickly, mostly by landlords wishing to rent them out (not a bad thing in my view, dont' see why everyone needs to own a house).

In the Times Today:

> Help to Buy isn’t building bubbles, says Bellway: The Boss of one of Britain’s biggest housebuilders has denied that the Help To Buy scheme is stoking up a house price bubble.

> Housing recovery gains momentum as buy-to-let lending rises to £5 billion: Buy-to-let lending topped £5 billion in the second quarter of the year, the highest since the financial crisis struck almost five years ago.
 
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