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.

 

[zambuck]

Story of Recession.......

(From a webiste forwards4all.com)

This story is about a man who once upon a time was selling hotdogs by the roadside.

He was illiterate, so he never read newspapers.

He was hard of hearing, so he never listened to the radio.

His eyes were weak, so he never watched television.

But enthusiastically, he sold lots of hotdogs.

He was smart enough to offer some attractive schemes to increase his sales.

His sales and profit went up.

He ordered more a more raw material and buns and use to sale more.

He recruited few more supporting staff to serve more customers.

He started offering home deliveries. Eventually he got himself a bigger and better stove.

As his business was growing, the son, who had recently graduated from College, joined his father.

Then something strange happened.

The son asked, “Dad, aren’t you aware of the great recession that is coming our way?”

The father replied, “No, but tell me about it.” The son said, “The international situation is terrible. The domestic situation is even worse. We should be prepared for the coming bad times.”

The man thought that since his son had been to college, read the papers, listened to the radio and watched TV.

He ought to know and his advice should not be taken lightly.

So the next day onwards, the father cut down the his raw material order and buns, took down the colourful signboard, removed all the special schemes he was offering to the customers and was no longer as enthusiastic.

He reduced his staff strength by giving layoffs.

Very soon, fewer and fewer people bothered to stop at his hotdog stand.

And his sales started coming down rapidly, same is the profit.

The father said to his son, “Son, you were right”.

“We are in the middle of a recession and crisis. I am glad you warned me ahead of time.”

MORAL OF THE STORY: It’s all in your MIND! And we actually FUEL this recession much more than it is.

 

[Mr. Charts]

Re above post.

Spot on about hot dogs, but some of the problems include insufficient credit liquidity, as well as confidence.
The son would have been correct if the product had been new cars, but low value items like hot dogs tend to be more recession proof due to low cost and customer migration from higher cost food items.
But, yes, you have to not only believe in the future but actively work to make it a reality.
Confidence and drive and not believing and accepting other people's negative ideas, but assessing the situation for yourself and acting accordingly.
Richard

 

[zambuck]

....Yes agree...but then if 90% of hot dog sellers and similar, go in this mode....rest will follow....

...Nature of mankind is to hoard when in uncertain future.....

....If gods drink milk then Tesco will run out of milk.......If there is shortage of milk then people will buy 5 times the need.....

...If there is apparent shortage of cash then people will put it under the mattress.....

....Essence of the story above is very relevant if human nature is added as part of the equation.....

 

[0007]

What about this version?

[FONT=&quot]Story of Bubble / boom....... This story is about a man who once upon a time was selling property in an estate agency. He was illiterate, so he never read newspapers. He was hard of hearing, so he never listened to the radio. His eyes were weak, so he never watched television. But enthusiastically, he sold lots of property. He was smart enough to offer some attractive schemes to increase his sales. His sales and profit went up. He arranged more and more mortgages and finance to sell more property. He recruited lots more supporting staff to serve more customers. He started offering 125% loans. Eventually he got himself a bigger and better bank to back him. As his business was growing, the son, who had recently graduated from College, joined his father. Then something strange happened. The son asked, “Dad, aren’t you aware of the great boom in Buy to Let that is coming our way?” The father replied, “No, but tell me about it.” The son said, “The international situation is incredible. The domestic situation is even better. We should be prepared for the coming boom times.” The man thought that since his son had been to college, read the papers, listened to the radio and watched TV. He ought to know and his advice should not be taken lightly. So the next day onwards, the father increased his borrowing and erected even more colourful signboards, and improved all the special schemes he was offering to the customers and was even more enthusiastic. He increased his staff strength by giving even bigger performance bonuses. Very soon, more and more people stopped at his estate agency. And his sales started increasing rapidly, same as the profit. The father said to his son, “Son, you were right”. “We are in the middle of a boom and bubble. I am glad you warned me ahead of time.” MORAL OF THE STORY: It’s all in your MIND! And we actually FUEL the boom much more than it is.[/FONT]

 

[Mr. Charts]

....Yes agree...but then if 90% of hot dog sellers and similar, go in this mode....rest will follow....

...Nature of mankind is to hoard when in uncertain future.....

....If gods drink milk then Tesco will run out of milk.......If there is shortage of milk then people will buy 5 times the need.....

...If there is apparent shortage of cash then people will put it under the mattress.....

....Essence of the story above is very relevant if human nature is added as part of the equation.....

Absolutely right.

 

[Trader333]

If there is apparent shortage of cash then people will put it under the mattress

In my view this does not apply to the vast majority of the population who did not have cash to start with and were mostly living off credit.


Paul

 

[zambuck]

....The statement was meant as a 'figure of speech'.....

....Base message intended was that, in critical times, people will be careful with whatever amount of money they have......

....But if one does not have penny of his or her own,, but have used credit cards to the hilt then quite franky they are not part of the housing scenario....and deserve what comes their way..!

 

[counter_violent]

Property can only recover after unemployment has turned the corner....and that's at least 5 years away....so forget about it

 

[Black Swan]

Property can only recover after unemployment has turned the corner....and that's at least 5 years away....so forget about it

Bang on. It's stunning how this fundamental indicator is constantly ignored, there appears to be a form of collective denial in the media as to just how bad the unemployment numbers have been; both in the UK and the US and the overall affect this has on economic performance. FFS they have hundreds of thousands homeless/unemployed folk queuing up for soup and medicare in the US but we get stories re. how Michelle Obama encourages kids to "live that dream"... IMHO we're looking at a fifteen - twenty year (Japanese style) 'recovery' for house prices.

 

[0007]

Bang on. It's stunning how this fundamental indicator is constantly ignored, there appears to be a form of collective denial in the media as to just how bad the unemployment numbers have been; both in the UK and the US and the overall affect this has on economic performance. FFS they have hundreds of thousands homeless/unemployed folk queuing up for soup and medicare in the US but we get stories re. how Michelle Obama encourages kids to "live that dream"... IMHO we're looking at a fifteen - twenty year (Japanese style) 'recovery' for house prices.

and just how bad the unemployment numbers are yet to be

 

[Atilla]

Property can only recover after unemployment has turned the corner....and that's at least 5 years away....so forget about it

Assuming the unemployed are the collective buyers??? I reckon this is a very small - low end of the market perhaps.

There is much pent up demand in the housing market at the moment.

The turn around depends on price adjustment, yield and effective inflation. Anybody who remembers 1974 oil shock - deep recession / stagflation will know what happened to house prices throughout 70s / 80s.

imo house prices will start to recover between 4th Qtr 2009 and 2nd Qtr 2010


Full employment no longer a government objective. The unemployed don't matter to Government. If anything adding pressure on wages to be restrained so good for the economy they will say.

Stable prices were a government (BofE) target but no longer.

National debt is the pain in the butt.

Taxation is not the answer although the correct solution.
Government borrowing has been effectively ruled out.

Only solution is inflation to erode debt. No two ways about...


I reckon World Cup in 2010 and Olympics in 2012 with a good dosage of inflation is the cool way to get us out of this mess.

 

[zambuck]

.....Yes precisely.....

 

[laptop1]

Porridge is living on another planet, like his master, Gordon Brown.
Perhaps he thinks the human population should be treated like an animal population and culled when it is consuming too many resources. Conservative returning constituencies must be a prime target for "population adjustment" to ensure the continued return of Labour governments and because Conservative voters must be better off and therefore consume more, thus being enemies of the state and people. You can see the way these do-gooders and we know better than you what's good for you socialists think.
At least their days in power are numbered - at least for a few years until the Tories **** things up and the pendulum swings again.

Yes agree, who does Porritt think he is, and what right does he have to say , UK population must fall to 30m. In my opinion, there is plenty of room for everyone and enough food for everyone in our lovely world....Bloody governments who are they to tell us what is right. We all need to wake up and show them, they cant fool us any more.

 

[counter_violent]

Well I don't have an economics degree so perhaps not qualified to take a view on the state of the nation....but not to worry

Assuming the unemployed are the collective buyers??? I reckon this is a very small - low end of the market perhaps.

Any recovery of note simply has to start at the low end of the market. Always has always will.

There is much pent up demand in the housing market at the moment.

I travel widely and have noted that there are tons of half started and half finished housing building works...clear lack of demand i'd say and general confidence.
Construction is on it's **** and building sites used to be a hive of activity but now all i see is the odd tradesman pottering about.

The turn around depends on price adjustment, yield and effective inflation. Anybody who remembers 1974 oil shock - deep recession / stagflation will know what happened to house prices throughout 70s / 80s.

Peak birth rate in the UK was in 1964...and consequently demand would naturally filter through in the late 70's to late 80's. These days demand can only come from movement of peoples into the UK....and I suspect that now the UK is seen as a basket case...people will stop coming.
imo house prices will start to recover between 4th Qtr 2009 and 2nd Qtr 2010

Full employment no longer a government objective. The unemployed don't matter to Government. If anything adding pressure on wages to be restrained so good for the economy they will say.

It's too late for the current Govt to have any possitive effect on unemployment and i have no doubt they will be shown the door at the elections next year.
Unemployment has been concentrated in the private sector....just wait until the knock on effects are seen in the public sector.....there are a great many who have escaped so far.....but they know their turn is coming. Teachers demanding 10% this week who do they think will be paying for all this nonsense?
The mood in this country is shifting from one of...just putting up with all the nonsense...to one of making govt and officialdom accountable for every penny they screw out of the system.

Stable prices were a government (BofE) target but no longer.

Temporarily yes...but at some point reality has to return.

National debt is the pain in the butt.

In the good times national debt should have been paid down...ref Thatcher in the mid to late eighties.
This govt has been totally irresponsible just like a lot of previous Labour govt's...always ends in tears. Wilson jumped before the end of his term...he probably knew how ****ty things were....Blair...has he done the same ?

Taxation is not the answer although the correct solution.
Government borrowing has been effectively ruled out.

Only solution is inflation to erode debt. No two ways about...

If that is the only solution...it's worse than I thought. We are all in the deepest of brown stuff.

I reckon World Cup in 2010 and Olympics in 2012 with a good dosage of inflation is the cool way to get us out of this mess.

A feel good blip...a distraction...maybe....then normal service will resume...every trend turn has false tops and bottoms.....straight V tops and V bottoms are rare.

 

[Wisdomsteeth]

The housing market works upon a number of basic principles, the main being supply and demand. Population versus available housing resources, prices correlating to wage ranges, economic volatility, and inflation.

The industry is mainly controlled by agency factors requiring a constant cycle of flow of properties changing hands to retain regular business and cash flow. This is concerted by media sensationalism controlling the herd mentality by news of impending major doom and catastrophe.

Recent property price highs were generated by a growing global economy attempting to create economic egalitarianism. This has succeeded to a degree. The present recession was envisaged by market pundits who are all to o aware of the pressing need to create a global currency to reflect the trend towards globalisation and the coming together rank and file across the board of the world community.

The current depression should ideally create a blank canvas upon which to pant this nirvanaic idyll. Potential for corruption is sought and all such expositions corrected. Property prices across the globe are reaching comparative equilibrium, as old market leaders bankrupt are purchased for a song and recent unemployment corrected in the doing so.

The wise make allowances whilst panic merchants beat their breast in woeful lamentations. Being amongst the number of the wise and rational is the preferred position. What goes up is also liable to come down, the beauty of the lows being we can then only rise...JJ.

 

[Hoggums]

People still have to live somewhere and if they cannot buy they will have no option but to rent. There are a lot of cash rich buyers around who are already starting to buy properties that are giving a good yield and as the yield rises more cash will be attracted to it. The idea that prices will drop by 50% means that some of us are going to get yields that are staggering. But as we all know that will mean more competition for the properties which in turn will increase the prices.

In my view it will not take too much of a further fall to see a big increase in the interest in buying. I agree that certain types of property located in certain areas may well see a large decline but to argue that this will apply on a general basis is unlikely.



Paul

I totally disagree with this. Too many people are still in the mindset that the last 10 years were normal and not some remarkable bubble.

The housing market is being fairly resilient to price drops at the moment because of near zero interest rates. Mortgages are cheap and people can afford to pay them. I don't anticipate any further huge drops until this changes. However I think volumes will remain low - and as any trader knows - you can't trust the price action from low volumes. Your argument re yields makes the assumption that rentals will remain constant while house prices drop. This is simply not true and I can show you plenty of anecdotal evidence that yields are dropping already.

The situation is very different now - you cannot buy a house with no deposit, no money down. It is nearly 2x as expensive today to go through the process of buying a house. And I don't think there is anyone here who doesn't think inflation is going to be a serious problem upcoming.

As soon as that happens and mortgages start charging at 8%+ interest rates there are going to be a lot of people struggling with the payments. Distressed sales and buyers expectations of further discounts will push prices down. All of this is combined with the downward pressure on wages due to the recession - I can't see how anyone could expect house prices to increase again in the short term.

Most people are not cash rich - it is they who decide mean house prices - not the hugely outnumbered investors - and house prices will not be affordable or sustainable when interest rates and inflation starts rising.

 

[anley]

I think I've said it before but it's my theory that the UK housing has NO chance of recovering until the vast majority stops thinking that the world revolves around the price of UK property.

Case in point. did anyone see how many positive property articles there were in the weekend press basis the Nationwide's recent 'report' suggesting a 0.9% rise in the last month? Maybe about 500,000 words collectivly.

Now when something like produces about 3 articles of less than 100 words, then we'll be near some sort of bottom..........

We'll see.

 

[Trader333]

Your argument re yields makes the assumption that rentals will remain constant while house prices drop. This is simply not true and I can show you plenty of anecdotal evidence that yields are dropping already.

Please do as so far all I have seen is rent prices having gone up as more people are having to rent because they cannot buy and so the competition for rented is increasing. The last property I rented out I had over 50 people desperately wanting it. I don't doubt that some rents may decrease but it is not my experience that yields are dropping and in fact quite the reverse.


Paul

 

[Wisdomsteeth]

Property prices, employment figures and productivity are indicators of an economies health. In a global economy each nation offsets its own figures against trends in other nation. Alas the world revolves around and is led by the market leaders here in England and in America. Bering one of their native numbers we may find this scenario alarming and unpalatable, but it is nonetheless true. House prices reflect income, inflation, and laws of supply and demand.

For ordinary householders the family residence and car are amongst the largest and most expensive purchase made in a lifetime the home being one of the main assets for the average individual. Controlling the housing market has provided markets with sound investment opportunities in what is a relatively steady sector.

It’s not the be all and end all in the grand scheme of things, for the aforementioned attributes has become a focal point of investors primarily for the reasoning cited. Gold is another point of example. Control of this asset has ranked it amongst the major commodities once resources and supply has come under control of they who control all. Housing and Gold were not considered viable investment fixtures for investors yet now we witness an indomitable presence amongst corporate and global rankings...JJ.

 

[Technically Fundamental]

As long as rent is not too diff from mortgage payments, stupid people will still want to buy houses. What could cause rents to drop in a time of high demand?