Kirsty was on the front page of yesterday's Telegraph trying to talk up house prices*, the possibly dumbest bit was this:
The people she finds most irresponsible are those who are trying to whip up fear. "There is a website called Housepricecrash.com** and I am their deadliest enemy ... There has been overpricing in some areas but this is not America. We are not going into freefall unless we panic ourselves into it."
Davros (comment 49) got in one of the best retorts:
Hang on, on the one hand lack of supply will support the market, there aren't enough houses etc. etc. Then the next minute we can talk ourselves into a housing crash!? Which is it? Either economics dictates that the crash is impossible or that's made up in order to keep the party going for those who've a vested interest in that happening.
C'mon, what's the answer to that, fatso!?
* The headline is "Locating the cause of the property crisis with Kirstie Allsopp". I do like the alliteration here, the way that 'crunch' is gradually being replaced by 'crisis' which will no doubt soon be replaced with 'crash'.
** As any fule kno, it's called "housepricecrash.co.uk", not ".com", sigh.
A grim document
4 hours ago
7 comments:
Head in the sand syndrome. She has to explain why this bubble is so fundamentally different from all previous ones as to be not a bubble at all.
It's interesting that on the front page of housepricecrash.co.uk, the highest forecast for UK growth is 3% (by a company whose prediction one month later was 1%). All others are 1% at most.
In my opinion, a flat housing market cannot now happen - not with the Buy-to-let sector as it is. For the first time, the buy-to-let sector is 10%+ of the market - both in numbers and total indebtedness (from about 1% last time). Since about the start of 2005, rents haven't covered costs; those who have bought since then are relying on capital growth as an effective income stream to offset losses (eg, house value increased £2000 in the month, rents were £750, costs were £1800 = nominal profit).
When the market is flat it becomes: house value increased £0-200 in the month, rents were £750, costs were £1800 = serious loss.
If you are in it for the money, there is a drive to sell a capital asset at the top of the market. It's inarguable that this has been reached (and passed). Further, this month the law on capital gains taxes was changed and most people who have bought in the last four or five years will be better off selling now.
So, how many buy-to-letters are in the position of now losing their effective income stream and making both a significant real and nominal loss each month, who will have spotted the top of the market and felt the siren call of "cash in while we're ahead" and are now in a significantly better position with regards to capital gains tax?
As of the end half of 2005, 576,700 Buy-to-let mortgages were outstanding. By the end of 2007, it was 1,038,900 (up an average of 154,000 per year, but this masks an acceleration year-on-year). Even with a possible weakening in the second half of 2008, there has to be more than 1,100,000 today, probably closer to 1,200,000.
So - half of the buy-to-letters are in that boat. That's five percent of the total mortgaged market who are facing every rational reason to sell up right now - and who can do so.
The first to do so will be best off. As the downturn gathers momentum, that nominal £0-£200 (or whatever) on the positive side of the ledger will start being negative. A little at first, but growing inexorably (and, rather importantly, predictably). More will blink and sell. The rate will grow. Buy-to-letters outside of that overstretched half will start tending to pocket the profits. The downward line gathers pace. The credit crunch bites more as fixed-rate mortgages expire and homeowners become overstretched, some having to sell. There's a non-trivial number of homeowners who are financing their lifestyle through property - buy-to-let landlords or simply equity-release junkies. The property route to income dries up and these people are left with unsustainable lifestyles - often forced to trade down (those who jump ship first will do best - again, predictably).
I reckon that it's going to be a crash the likes of which we've never seen before.
Thanks for crunching the numbers. Now try explaining that to The Hon Kirsty Allsop!
I saw the article but since I haven't a clue who Kirsty is I ignored it.
Great outline, Andy.
This Kirsty seems to think quite a lot of herself. Seems she's overconfident in too many ways.
The imminent arrival of a crash has been reported for at least five years, so I suppose there’s an argument that if people keep repeating something for long enough it will eventually happen. As it is, the credit crunch has been rumbling on since last summer, and nobody seems to be able to point out where the oversupply of UK housing stock actually is. The best anybody can come up with is that some buy to let investors who bought in the last couple of years, who are looking for short-term gains, may offload their investments because the returns don’t cover the costs in the short-term. There’s no doubt the housing market is slow, but this crash seems very tardy given its fanfare!
According to Rightmove's April 2008 survey "Annual rate of increase drops sharply from 5% [in March] to 1.3% [in April], the lowest level since July 2005". Seeing as wage increases/inflation is at least 4%, that looks like a yeat-on-year fall to me.
mjw,
the core problem isn't on the supply side (it's lower than it should be and has been for a considerable time), but the demand side. Then again, if 5% of mortgage holders are in a position to sell liquidly and all economic reason encourages them to do so, the availability of houses should increase.
On the demand side - I've seen commentators claiming that "people will always want somewhere to live", indicating that demand for houses can never decrease. Well, desire may never decrease, but the ability to support that desire with demand depends upon the presence of the money to do so and the willingness, when push comes to shove, to spend it on that object of desire rather than something else.
It's inarguable that the ability of buyers in the housing market to support their desire with money has been severely hit by the credit crunch. The actual monthly cost of (for example) a £250,000 mortgage today compared to two years ago is noticeably higher ... while essentials such as food and heating have increased a lot in the interim. Which means that servicing such a debt (which far fewer people will be able to obtain in any case) will take a far greater percentage of one's available income - just at the time that you'd need it to take less. This skews the cost-vs-value balance for individuals, of course, and for some it will still be worth it. For others, at the margin, it will not.
Demand down with supply constant = price fall.
Price fall = incentive for many to sell up = increase in supply.
Increase in supply = further price fall.
People see it happening, and (rationally) many decide to wait out to see how low it can go (others, of course, will still decide to buy in, whether because they have to or because buying now is of high value to them). As people wait out, demand falls further.
It's a feedback loop that will stop when enough people decide "hell, it can't go much further, let's buy" and have sufficient capability to do so at that price, and the number of people losing out (and unable/unwilling to sustain the loss) decreases sufficiently.
Of course, in the long run, the number of houses available and the number of people that want to live in them will push prices back up (and, once again, they'll overshoot). But as the man said: "In the long run, we are all dead".
If you are looking to buy and the probability of a deep crash worries you, the questions are:
- Can I obtain and sustain the required debt?
- Is the opportunity cost worth it to me (the high cost now compared to the probable far lower cost in the short-to-medium term)?
If the answer to both is "Yes", then buying - even in todays market - is a good decision for you. After all, in 15 years time, it will pretty much definitely be worth more than it is today. However, I'd start with an offer of no more than 85% of the asking price and try not to go over 90%. Buyers market.
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