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.

 

[rols]

Atilla,

3. If prices do not adjust sufficiently, inflation runs away along with wage inflation and global economic growth (China & India) continues unchecked with strengthening of their currencies and inflationary pressures then yes the whole global economy can go into stagerred meltdown coupled with stagflation and it can all get very messy.


You have hit the nail on the head. I think India and China are going to be the reason for the western economies having a very bad recession. India and China are going to conbat inflation in their own countries by allowing their currencies to rise instead of increasing interest rates. The Indians have already started this that's why inflation is picking up already, China may not be that far behind.
Monetary policy in Asia could end up destroying Western economies. It would mean that Asian central banks would export less capital into our bond markets and this would likely lead to a drift higher in real rates around the world.
Asian exchange rates would move sharply higher, which in turn would likely mean higher import prices in the US and Europe.
As Asian exchange rates start to move higher, Asia's private savers would likely start repatriating capital, further amplifying exchange rate and interest rate movements. This would also likely lead to collapses in monetary aggregates in the Europe and the US.
It is all out of our hands we are living on borrowed money in the western world and Asia can call in that debt at any time.

In a word - Derivatives. In four words - End of the world.

Derivatives are the new ticking time bomb - MarketWatch

'Blood on the streets in September" were the chilling words I heard from a City insider the other day.

There again the end of the world has been predicted in 2012 - this one looks pretty good
- so WTF is the point of worrying methinks?

Solar physicists have been waiting for the appearance of a reversed-
polarity sunspot to signal the start of the next solar cycle. The
wait is over. A magnetically reversed, high-latitude sunspot emerged
today. This marks the beginning of Solar Cycle 24 and the first step
toward a new solar maximum. Intense solar activity won't begin right
away. Solar cycles usually take a few years to build from solar
minimum (where we are now) to Solar Max (expected in 2011 or 2012).

Also certain scientific evidence does suggest we are
due for a flip of the Sun's magnetic field - an event once in 5000 years
predicted in the Mayan calendar called the Great Cycle which began in
3114 BC and ending December 21st 2012

There are an increasing number of web sites dedicated specifically to
this date - google and see (end of world 21.12.2012

This one is my fav
21.12.2012 Prophecy End of time End of the world

If anybody can understand it please let me know

Also the synchronisation of the end of the sunspot cycle, the
alignment of the Sun, Earth and Moon and the Earth's North magnetic
pole pointing to the Sun
hasn't occurred for 65 million years apparently.
Beyond 2012 page 1

Behind every cloud there's an even blacker one.....:cheesy:

 

[Atilla]

Atilla,

3. If prices do not adjust sufficiently, inflation runs away along with wage inflation and global economic growth (China & India) continues unchecked with strengthening of their currencies and inflationary pressures then yes the whole global economy can go into stagerred meltdown coupled with stagflation and it can all get very messy.


You have hit the nail on the head. I think India and China are going to be the reason for the western economies having a very bad recession. I wouldn't put it in those terms... India and China are going to conbat inflation in their own countries by allowing their currencies to rise instead of increasing interest rates. This is long over due for China as it already has a balooning trade surplus and is under selling it's resources. The Indians have already started this that's why inflation is picking up already, Raising exchange rates likely to reduce price of imports. Do you mean raising inflation in Europe and US? China may not be that far behind. I'm expecting China to go into melt down after the Olympic blues...

Monetary policy in Asia could end up destroying Western economies. I'm sorry but I disagree here again. Western economies doing pretty good destroying our own economies without foreign help. I think my perspective is different.It would mean that Asian central banks would export less capital into our bond markets and this would likely lead to a drift higher in real rates around the world. Monies will be invested where the returns are most favourable. Pure economics imo.
Asian exchange rates would move sharply higher, which in turn would likely mean higher import prices in the US and Europe.

As Asian exchange rates start to move higher, Asia's private savers would likely start repatriating capital, further amplifying exchange rate and interest rate movements. If you are referring to Dollars held by the Chineese and the Yen carry trades, I think we have already seen this happen with the Japaneese withdrawing support for the dollar and switching to Euro I think.This would also likely lead to collapses in monetary aggregates in the Europe and the US.
It is all out of our hands we are living on borrowed money in the western world and Asia can call in that debt at any time. Yes and where would they then spend all their hard earned currencies??? Monies have to be invested one place or another.

I'm still at phase one because if anybody posed the questions
1. what if oil hit $135 just over a year or two ago
2. gold hit $1000
3. EuroDollar = 1.60
4. Oil producing countries reconsidering the dollar standard being considered

People may have well laughed or cried but not as we are seeing it. In fact the global economy seems remarkably robust.

This is basically the mid-term cycle once every 20 years (8-21-55 year cycles) where market adjustements take place.

Hence I'm still in phase one (deep but short recession) and will re-evaluate accordingly as time progresses.

I have my deposit and I'm not afraid to use it once I see house prices 15-20% down...:cheesy:

 

[2be]

That is the right way to proceede, let the market come to you.
Do not forget the fact that 20% of the deposit based on todays prices would guarantee you much more bying power in a year or two compared to the current market condirions, and if you would consider buy to let, IMHO 20-30% deposit should be enogh even if the money supply is hard, what matters more is the ratio of the yield to the overall price that matters to you, and the ratio of the yield in proportion to the borrowed amount that matters to the bank. Over the last few years many were buying buy to let properties without any considaration of these factors, possibly hoping for capital growth, this prooves that there are many fools in the market, any market housing market included.
For now I think it is safe and wise to concentrate on trading, so that one would have more to dump as deposits when the right time comes. When it comes I probably shall assist my two kids with building their own portfolios, which would be a tax officient way.
Inheritance tax can be a killer to a portfolio, and one has to consider it now, as there are various optons possible with trusts and donations. At present the inheritance tax is not charged up to the first 600.000.00 plus, with the conservatives proposing to lift it to 1ml. Do not forget that sum includes the property you live in, and all your savings and above all your trading accounts
Happy trading,
2be

 

[breadman]

Atilla,
I think we both think their is going to be a considerable downturn over the next few years, we just think the length and causes are going to be different. Who cares how we get their as long as we can benefit from it.
My view is that the down turn will last anything from 2 to 7 years.
2009 and 2010 are going to be terrible, worse than this year.
have you ever looked at the nationwide house price index it's around £173500 now, the trend price is around £140000. Every time it's gone above trend price in the last 50 years it has come back to trend price or below. Buying around trend price would not be a bad time to buy I think.

 

[fibonelli]

There's a long way down :whistling

 

[Atilla]

There's a long way down :whistling

I suppose it depends how sticky and slippery it all gets... :cheesy:

I wait in great anticipation for the next 5 years... We live in rivetting times...

Cusp of a new era

 

[SAINT]

Buying around trend price would not be a bad time to buy I think.

Buying at the 'trend price' is basically buying anything at the moving average and your timescale for holding the investment would determine whether it's a 'good' buy or
not.

As always, after getting carried with the upward pricing, don't expect consumers in the UK to magically support the market at your 140k trend. More than likely, the fear driven herd mentality will kick in and make the drop worse.

 

[Marwan2010]

Of so many articles submitted, this one has drawn so many interesting debate, and very educational. So hats of to Bindal FX. really enjoy watching Jay's video tutorials and articles.

Extremely interesting posts by Atila and Breadman - valid debate. there is no question in my mind that the boom in China and India will have adverse impact in the western economies. We got to accept that there are LIMITED RESOURCES, and Bush has got on record saying that the inflation has been created by the Indians eating more!

We are also now seeing both India and China aggressively looking at Africa, and both are investing heavily in Africa. Americans are just waking up to that prospect!

As one thread said earlier, that in decades to come, we could see Western workers producing cheap products for China! - It is feasible, and looks likely to happen.

But before that, would the Yanks do anything stupid to hold on to it's supremacy?
Lets face it - It is the ONLY country on earth to have used Nuclear Weapons.

 

[breadman]

Buying at the 'trend price' is basically buying anything at the moving average and your timescale for holding the investment would determine whether it's a 'good' buy or
not.

As always, after getting carried with the upward pricing, don't expect consumers in the UK to magically support the market at your 140k trend. More than likely, the fear driven herd mentality will kick in and make the drop worse.

Saint,
I agree, I am only using the trend price as a guide. Prices may not fall to trend, they may stop at trend, or go right through. It's a few years down the line anyway. I will just keep watching until I think I am getting better value for my money. It's cheaper to rent than buy at the moment anyway so waiting is not a problem.

 

[normbeef]

HOORAHH... at last some people who can see past their nose... I have been Banging on about this for a while now, and since most people clearly still have their rose tinted sunglasses on and they cannot understand that there is now a massive shift of power happening right before our very eyes !!

Africa.. is VERY good long term bet... I know there are some funds about that are looking to capitalise on the investment by the Chinese / Indians...

After all they will need some sweat shops of their own to produce the goods even cheaper than they do... when they all become middle class consumers lol

 

[Marwan2010]

ROLS - your post is frightening...................

To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:
U.S. annual gross domestic product is about $15 trillion
U.S. money supply is also about $15 trillion
Current proposed U.S. federal budget is $3 trillion
U.S. government's maximum legal debt is $9 trillion
U.S. mutual fund companies manage about $12 trillion
World's GDPs for all nations is approximately $50 trillion
Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
Total value of the world's real estate is estimated at about $75 trillion
Total value of world's stock and bond markets is more than $100 trillion
BIS valuation of world's derivatives back in 2002 was about $100 trillion
BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

 

[Marwan2010]

This one is my fav
21.12.2012 Prophecy End of time End of the world

If anybody can understand it please let me know

:

it is along read, give me till the weekend
it looks interesting!

 

[rols]

ROLS - your post is frightening...................

To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:
U.S. annual gross domestic product is about $15 trillion
U.S. money supply is also about $15 trillion
Current proposed U.S. federal budget is $3 trillion
U.S. government's maximum legal debt is $9 trillion
U.S. mutual fund companies manage about $12 trillion
World's GDPs for all nations is approximately $50 trillion
Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
Total value of the world's real estate is estimated at about $75 trillion
Total value of world's stock and bond markets is more than $100 trillion
BIS valuation of world's derivatives back in 2002 was about $100 trillion
BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

At last. Somebody noticed!

If I thought about the above for longer than 2 minutes at a time I would not be able to sleep at night.

The implications for us all are truly horrendous.

For many the 'End of The World' would be the preferable option.

 

[normbeef]

Big bubble of S**t

At last. Somebody noticed!

If I thought about the above for longer than 2 minutes at a time I would not be able to sleep at night.

The implications for us all are truly horrendous.

For many the 'End of The World' would be the preferable option.

So when it explodes we all get covered right...

 

[Atilla]

At last. Somebody noticed!

If I thought about the above for longer than 2 minutes at a time I would not be able to sleep at night.

The implications for us all are truly horrendous.

For many the 'End of The World' would be the preferable option.

No worries...

That's in dollars. with a pinch of inflation.

What's the real value of all that in gold???? :smart:

:whistling

 

[Marwan2010]

At last. Somebody noticed!The implications for us all are truly horrendous.QUOTE]

On the other hand, who cares!!!! - lets just enjoy, have fun, nothing but absolute fun.
if it is meant to be, it will happen.

 

[breadman]

As of today 2 year fixed mortgage with Nationwide is 6.25% with a 25% deposit. I expect by the end of the month everyone with less than 20% deposit will be paying at least 6.75%.Their is a awful lot of people with 80% plus mortgages who are going to be under pressure.Their is no one in England who took out a mortgage in the last couple of years who thought they would have to pay 6.75% to borrow money, they are all in for one hell of a shock.

 

[Marwan2010]

As of today 2 year fixed mortgage with Nationwide is 6.25% with a 25% deposit. I expect by the end of the month everyone with less than 20% deposit will be paying at least 6.75%.Their is a awful lot of people with 80% plus mortgages who are going to be under pressure.Their is no one in England who took out a mortgage in the last couple of years who thought they would have to pay 6.75% to borrow money, they are all in for one hell of a shock.

this is true story, my ex neighbour had emigrated to australia, having let his house, but also about a dozen buy to let. The property was empty for few months, with unpaid rents, as the tenants had lost the jobs. The house left in an absolute mess. He has jusr returned back to UK, to sell his portfolio. The guy spends thousands to do it up. it has been on market for 2 weeks, and so far not a single viewer.

As soon as those Buy to lets guys starts to panik - it will be a HELL!

 

[normbeef]

not for all of us... I will waiting with the cheque book out for some tasty bargains... mmm

 

[Marwan2010]

not for all of us... I will waiting with the cheque book out for some tasty bargains... mmm

absolutely!!! as i said b4, more millionnaires are made during the recession then the boom.

what I meant is it will be hell for these buy to let guys,
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 they listened to all those crook finanacial advisers!