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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I have been told by various bargain house hunters in the UK lately that "we are near the bottom" ... I can barely contain my exitement at the thought of them being wrong and the warm feeling I get by not having any property in any part of the world at this time...

Far be it from me to make any kind of prediction..(but I will anyway). but I really dont think we have seen anything like the end of this recession / property correction / credit crunch etc. etc..

personally I am about to load up on GOLD.. for the next couple of weeks... I think if GM annouce Chapter 11 then the markets will tank at the though of MASSIVE layoffs accelerating the US jobless..

I did say that Obama would save the world, but not just yet....


I like to re-visit things that have been said... It breaks my heart to think of those poor Guys working all over the world for GM some who are about to get canned... they have to go home and face their familes tonight...

As for the incompetence of the management...

Here is another call.... the dow is going to TANK...

The UK housing market is woefully exposed.... falls for another 2 years .. minimum

happy trading...
 
And so it should (fall - house prices that is).

If you look at the ratio of average house price to average salary, it is still much, much higher than when I was starting out in life. A whole generation (my children's generation) has been denied the sort of chances that my generation took for granted, because of the greed of....well, my generation and a lot of others.

The biggest culprits were the buy-to-let merchants and those who encouraged them.
 
Anecdotal evidence on UK housing market:

As part of an estate disposal I recently completed sale of a "bog-standard-always-in-demand-3-bed-semi" in Leicester at a price agreed last March which was about 20% down from the peak. This was a realistic price to get a sale (and it worked).

Estate Agent now informs me that they couldn't get the same price now - properties are selling but prices are going down. Draw your own conclusions.
 
Property and assets will be the biggest earner for anyone over a period of time......Pensions and Endowments will not......and has NOT been......

The classic case of supply and demand....fuelled by immigration from EU and abroad with Asian markets opening up and staff exchange etc......and partly not controlled by lending by banks, meant that a typical barman, and cleaning lady got on the swing boasting about their 'two packs'....!!...Nothing wrong with them buying, but it was possible only in 110% lending, with a gamble that in two years we will have increase...!

There will be and there still is a huge demand for houses and this pressure will intensify due to lack of support from Govt and 'nibyism' in villages....

A straight line chart of property prices from 50 years still will show that prices have touched the straight line average line....but it did peak markedly. That was fuelled by classic symptoms of laggards then trying to get on the swing to keep up with Jonses....They will be burnt....!!

Graphs > Average house price - HousePriceCrash.co.uk
 
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It's always the case in UK, Labour mess it up and Tories have to clear the mess, and then they get a bad name!
 
Getting desperate are we?

http://www.housepricecrash.co.uk/


Inflation is so well infested within the sytsem - just wait until price of oil and VAT rates begin to rise.

Come spring time the birds and bees will be flocking to buy houses in their 000s - not to mention foreigners before the pound starts soaring.

Barclays have just started a mortgage campaign and as the economy picks up more offers will abound.

Couple of months fall and doomsters singing the blues... :cool:

Moreover, check out London price increases and then check out the predictions... :-0 on that ink...


How wrong can any prediction be??? Ultimately proof of the pudding will be in the eating...

 
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Come spring time the birds and bees will be flocking to buy houses in their 000s - not to mention foreigners before the pound starts soaring.

Hmm, well it remains to be seen but I am of the view that the opposite is most likely.

What makes you think that people will be flocking to buy in Spring ?

Why do you think the £ will rise and against which currencies ?


Paul
 
Hmm, well it remains to be seen but I am of the view that the opposite is most likely.

What makes you think that people will be flocking to buy in Spring ?

Why do you think the £ will rise and against which currencies ?


Paul

Fact of life - just the way it is. In the winter with cold dark nights people don't think about moving or viewing property. People plan to get married in spring and summer and nest building takes precedence. Property prices always slow in autumn and winter and pickup in spring and summer time. C'est la vie!

Trying to determine what the price of any currency is a tough call but as this government is hell bent on paying the debt off ASAP in relation to other countries' fiscal defecits then sterling will appreciate. It has been doing so already and this trend will continue.
 
Property prices took their largest fall in September on record. With the increases in cost of living biting severely in the New Year plus ongoing increases in unemployment, I doubt there will be much increase in property prices nationally although London could slightly buck the trend.

It has been doing so already and this trend will continue.

Not against the Euro it hasn't and if anything is not far off approaching parity.


Paul
 
At least we not like countries like china where mortgages are given at 90 year terms. Imagine buying a house that only your grandchildren can complete the contract
 
There must have been many sleepless nights in surburbia yesterday.

House prices fell, and are continuing to fall!

Some people might now think that life is not worth living anymore :)
 
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Remember the paradox of a strong housing bull market - it bought on the worst recession since the 1930s..........

Imagine if house prices never really rose that much? Imagine how much extra disposable income everyone would have and how much money they could fund their personal pensions. Life would be a lot better that way for the majority but most still seem to think that the planet revolves around the high price of a house........
 
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Property prices took their largest fall in September on record. With the increases in cost of living biting severely in the New Year plus ongoing increases in unemployment, I doubt there will be much increase in property prices nationally although London could slightly buck the trend.



Not against the Euro it hasn't and if anything is not far off approaching parity.


Paul

Agree.

The govt is operating a scheme near me whereby you mortgage only 70% of new build and they foot the other 30%. Still shows as a 100% sale on the P&L for Bellway :) sneaky sneaky.

I'm thinking housing benefit cap may cool down London property a bit when it actually kicks in. If the interest only brigade cant reach B/Eish and start eating further into their capital appreciation y/y anyway.
 
Property prices took their largest fall in September on record. With the increases in cost of living biting severely in the New Year plus ongoing increases in unemployment, I doubt there will be much increase in property prices nationally although London could slightly buck the trend.

Not against the Euro it hasn't and if anything is not far off approaching parity.


Paul


The other side of the coin ofcourse is UK house prices are cheaper for the Brit lovers in Europe... Effectively Euro has greater purchasing power and thus cheap property.

Win win scenario...

Next stages are; inflation / interest rates hike / recovery gathers pace / more inflation... :smart:
 
The other side of the coin ofcourse is UK house prices are cheaper for the Brit lovers in Europe... Effectively Euro has greater purchasing power and thus cheap property.

Win win scenario...

Next stages are; inflation / interest rates hike / recovery gathers pace / more inflation... :smart:

Yes I can just see all of those people rioting over lost jobs and austerity gathering a deposit >their salary, rushing to a bank that doesn't lend and snapping up overvalued property in a small island on which the government is about to implement the largest budget cuts since the war.

That being said I didn't listen to you about gold :p
 
The other side of the coin ofcourse is UK house prices are cheaper for the Brit lovers in Europe.

There aren't any are there ?

I agree that because of the GBP approaching parity with the Euro that increasing inflation is inevitable because we import everything which means prices will go up as a consequence.


Paul
 
Don' want to fire up that old chestnut 'inflation/deflation' - incase Rothchild is lurking on the threads :cheesy: but given the extent of money sloshing around in the system I did think couple of years for it to feed in was not unreasonable. US lagging but their housing market considerably different to UK.

I had these discussions with our bond traders and the jury is out as to how this QE and billions translates into the the real economy. I'm yet to hear a plausible explanation. Some say it even has no bearing in which case what's all the fuss about. I'm none the wiser.

All I know is we've had billions thrown into the economy whilst output had dropped. Once all the dirt money comes out in the wash - inflation inevitably will rise in the absence of any corresponding increase in output or productivity.

I also did say we only have two options out of this mess - and only two.

1. Raise taxation to reduce aggrate demand
2. Keep interest rates low to stimulate investment

This is precisely the policy that is currently implemented.

I remember the 70s, 80s, 90s, 2000s like yesterday. Every ten years. Clock work. I doubt the 2010s will be any different. House prices will rise just as the sun will rise tomorrow.

We are at the cusp of a new wave - steady as she goes... ;)

Interesting article http://www.marketwatch.com/story/the-biggest-qe-surprise-may-be-nothing-2010-11-02
 
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