Property !!!!!! A Nation Hypnotised? Blog Discussion

System

I would actually advise anyone to go this way. Would you really like to live on pension credit, currently 114 pounds a week?

They dont just get pension credit do they? If their income is low enough they qualify for rebates on both council tax and rent. You get no such help when you own your own house.

EdInvestor

You get council tax rebated if you get pension credit and have a home, not housing benefit obviously, as you don't need it.You can also get cash out of your home via equity release schemes (mortgages which don't have to be paid back in your lifetime)and you can earn tax free income by letting out a room. There's quite a lot of flexibility.

BTW this "pension effect" on the property market (particularly on the BTL aspect) could be about to get worse.

This week we've had many reports like this one about the collapse of private pensions, and next week many people are going to receive scary letters telling them that their company pension schemes are underfunded.

This tends to increase the perception that pensions are very risky indeed, and that property is a better bet, hence the rush into BTL (my property is my pension,etc). But it's never a good idea to have all your eggs in one basket - that just increases the risk.

whambamboo

EdInvestor wrote:

It is possible to make arrangements to use both IHT nil rate bands.



I think the answer to that is you wait a little bit longer People do need to regard property as a very long term investment - 25 or 30 years:7 years is a blip.

There is one main problem with advising today's young generation not to buy a home I think.

Oh dear, you're missing the point, as others are on this thread, time and time again.

Today's young generation is not being advised not to buy a home. It is being advised not to buy it at a price that is at the highest ever level relative to any benchmark you care to name, and wait 3, 4 or 5 years till prices are at saner levels. This will leave you with a better asset on retirement

In 1989 prices were too high. If you bought in 1989 you would have 25% less money now than if you had bought in 1996. And not only that, if you'd put the money in the bank, high interest rates would have meant that your capital would have almost doubled over that period.

So taking your advice to treat a property as a pension you could have half as much money on retirement by buying at the wrong time.

Yes, buy a home, for many people it will b e the only real asset they have, and they can use it to finance a liveable retirement. BUT DO NOT BUY IT WHEN PRICES ARE MUCH TOO HIGH!!!!

Long term or not, buying at high prices is always always always wrong, and will leave you much poorer than buying when prices have fallen.

EdInvestor

BUT DO NOT BUY IT WHEN PRICES ARE MUCH TOO HIGH!!!!

Ah yes, hindsight is a wonderful thing.Please pass the crystal ball

Let me give you an example.

Quite a few people thought the property market had peaked in around 2001 and would proceed to crash - that's when all the "house price crash" websites and property bears started appearing.

So according to a market timer, people should have sold out of property then, and put the money in shares - that's the other risk-based asset class.

But that person would then have had a seriously nasty experience, because the stockmarket then crashed spectacularly, so he would have lost as much as half of his property gains.

Meanwhile the property market didn't crash.It sat stagnant in London up until last year, when it started to take off again.Elsewhere it boomed, but is now sitting stagnant waiting for people's wages to catch up, just like London was before. In a couple of years time, like London, will it boom again?Or will it crash?

Do you know?I don't.

Would it have been good advice not to buy in 2001 because prices were "too high"?

No. It would have been terrible advice, especially outside London.

Timing the market (whether property or shares) is a mug's game.

PS.I agree with Martin's comments about property snobbery.There are some people who like the flexibility and freedom of renting.They enjoy being able to move around and they don't want the responsibility of owning and maintaining property,having mortgage debt etc.

People like this should resist being pushed into buying by snobs who treat them as low class. Because there's so much landlord competition now and rents are so low (while interest rates are quite high), they probably have a much nicer home than the FTB snobs anyway,not to mention a better car, sexier holdiays and a nicer TV.

Each to his own, horses for courses, that's what I say.

whambamboo

EdInvestor wrote:

Timing the market (whether property or shares) is a mug's game.

That's not totally true. Your argument is that the bears were wrong in 2001, 2004, whenever, so they must be wrong now.

Given that prices have risen so much since 2001, they are much more likely to be right now!!!!! A price crash is more likely now than it was in 2001, and there's further to fall. The risk is much higher, because you have to spend more for the same thing than you did then, so you stand to lose more money - hundreds rather than tens of thousands.

As any sensible investor knows, when you take on a higher risk, you expect a higher return. That is not the case for property at the moment - risk is high as values are high by historical ratios, indicating a potential for substantial falls, but returns are very low. It is currently cheaper, and lower risk, certainly for houses (rather than flats), to rent than buy. And the most optimistic estimate is +5% house price inflation for next year. That's the optimistic. The more bearish are looking at double figure drops.

Tell me why, again, because you haven't explained, I should buy a property, when I currently pay £1100/mth for a property worth £350k+, and the interest payments (no repayments!) on that would be 50% higher than my rent! And there's very little prospect of meaningful growth in the next 3 years.

It's quite clear: there is a risk in the current market of a substantial fall in asset values. And it's not like a small investor buying £2k of shares - no, you are geared up to your eyeballs, so you could lose 10* what you've actually put in.

PROPERTY IS VERY HIGH RISK. If I put £5k down and buy a house in Moss Side for £100k (yes, shocking as it is, that's what they're going for - e.g http://www.rightmove.co.uk/viewdetails-5717393.rsp?pa_n=1&tr_t=buy), and prices drop to a more realistic level, say £50k, I've lost 10 times my initial investment, and it could be years before I get my money back - assuming I can afford the repayments.

This is much riskier than buying £5k worth of shares in even the most volatile sector of the most volatile market in the world - if you do that, the most you could lose is £5k. And yet the investor gurus tell us to have a balanced portfolio, a mix of investments, but they are happy to gear at ridiculous levels to buy into overvalued property.

You'll probably tell me that 'long term investment, 25 years, blah blah blah, Moss Side will be desirable in 25 years time'. But that's not reality: bottom line is, you could be struggling to afford your house in Moss Side, worrying about your kids being shot, and interest rates rise 2%, and then you can't afford the payments either. The house loses its value, you walk out, the house is repossessed, you get made bankrupt.

Oops.

And that's reality - prices aren't at stratospheric levels because of careful saving, rising wages, they are there because people are up to their eyeballs in debt. If it wasn't for self-certify, 'more(on)-gages' like the 125% product, and massive lending multiples, people would not have been lent the money in the first place.

For very many people their budget just balances. £2.5k in, £2.5k out. There's not many people with the buffer for job losses, interest rises, etc.

And it's not like it's not happening already overseas.

I suggest you read http://thehousingbubbleblog.com/?p=1488#comments

There is a bloodbath already underway in the US. Six figure price drops, 40% YoY sales falls.

Sentiment changes in 1 or 2 months. People are just watching the carnage. People are saying "houses are going for $1000k, but there's no $250k jobs here to pay for them". The same thing that we have in this country - except in this country the inflation has been much worse, so the fallout could be worse than it is there.

One comment proves the lie, made earlier in the thread, that when prices fall people rush to snap up a bargain, chasing prices higher again. BS - they wait a bit longer:

"Shannon, my wife and I are still trying to buy (although, we’re going to wait till this thing hits near-bottom) "

And don't think this crash has happened over years - it's happened over a few months, and now is unstoppable. Prices are down 25% in one year. Once the ball starts rolling, you're in deep trouble.

That's reality, prices start to fall, the Daily Express starts screaming 'New Diana evidence leads to 10% fall in the value of YOUR HOME". People see falling prices all around, they see the headlines, and they start saying "If I wait 3 months I can get it a bit a cheaper." That sentiment doesn't change overnight, just as the crazy bull market we have now hasn't changed overnight. Once sentiment changes, you have a long, long downward trend, and it took 7 years time to stop - this time it could be worse.

Are you saying that's not going to happen again here?

I have no aversion to risk, but if I am going to take it on (by buying property), sensible economic theory suggests I should get massive returns to compensate - give me some volatile Indian fund returning 20% YoY sure - but housing with 3.5% net yields, major hassles managing it, and capital growth no better than 3-5% over the next few years, and quite possibly negative? Don't make me laugh.

whambamboo

here's more on what's happening in the US.

http://www.bubbleinfo.com/journal/2006/8/10/whats-a-buyers-market.html

""Buyer's Market" is a term we're hearing more and more, now that the real estate slowdown is making front-page news.

Here's a definition of a 'Buyer's Market':

A 'buyer's market' is the psychology that causes buyers to want to WAIT AND SEE WHAT HAPPENS. Unless they find the perfect house at the perfect price, the waiting leads to indifference, which causes the fence-sitting to become very comfortable for buyers.

As a result, there is mounting pressure on sellers to lower their price, to entice the buyers off the fence. This creates the proverbial 'downward spiral', where each sale is lower than the one before.

This is the current state of the market, and why the number of sales has slowed considerably.

If you are trying to sell, and are determined to hold out, I'd urge you to reconsider. It can be a humiliating ride down, price-wise.

It is better to get out, than to hold out."

And the replies

"I am happy to rent until prices are reduced at least 25% - 30%. Can today's sellers "hold out" that long - I don't think so. "

I think we will be seeing this here soon.

bugly_2

At last people are seeing the light, i divorced 3 years ago left a 3 bed end terrace house to ex. I walked away with nothing except a caravan. And even that was stolen after 3 weeks!. I now live in a 5 bed house in the middle of a farm, i fish from my garden in the canal that runs along side. I have full access to acres of land, ponies in the paddock and a drive that takes 30 cars. No one disturbs me i have no neighbours, rent is fixed at £850. Our joint income was £70k and we couldnt get anything like this. Now i have taken a year out and am earning enough on ebay to pay the rent ha! forget retirement funds from property, create low input residual income -live now, i have seen too many friends die early. My kids will fend for themselves and the life insurance will help them.
I love this site it shares my ethos on life.

vishpatel

whambamboo - have to agree.

Timing the market is certainly not a mugs game. If it was, how come there are loads of successful investors out there? They are in the minority, granted - but I am certainly not ready to rule myself out of that category just yet. You can either choose to have confidence in your own view of the economy, or be a sheep.

It certainly leaves you open to being wrong, but I'm not worried about that. At current prices I see property as very poor VfM and so I choose not to buy. That might change in the future. Personally I plan to buy when the hype reverses and the majority of people are anti-property.

This country really needs to get over its obsession. Sadly, I think its too late though...

One more point - I also think Martins own position is significant. You can draw your own conclusions.

whambamboo

By the way, I like this guy a lot

http://www.bubbleinfo.com/

He's an estate agent, selling people's houses in California. Some less realistic agents are saying

"Mortgage rates are still well below those of the past several decades."
and using this to justify continuing higher prices

He quite correctly says that this is wrong. Long-term average rates are irrelevant. The only rates people remember are those of the last two years. They do not remember 1989, they remember 2004. Here, as there, rates are higher than they were.

All the arguments are the same "People will still continue to come to San Diego" Same argument, different place, is used for the UK, and it's as wrong here as it is there - if housing costs too much for the jobs you can get, prices will fall, regardless of how lovely San Diego/London, etc. might be

Every asset bubble always bursts.

EdInvestor

Bugly's case is the sort of "win win" I mean.He gets a better quality of life at a cheaper price, his landlord gets his investment serviced, everyone's happy.It's likely that most (70% or more) people will want to buy at some point in their lives - but there are always times when renting is preferred.There is nothing wrong with this.

What I'm saying is that over long periods, like 25-30 years, it doesn't matter whether you went into the market at the top or the bottom ( this applies to shares as well).Unless you are one of the minority of skilled investors who do know how to time the market (there are a few) it's pointless trying, as you're just as likely to get it wrong as get it right, like all those people who sold out 5 years ago - or who didn't wait those few extra years for their 1989 purchase to come good.

And since all property is local, there's an extra risk in trying to make predictions that fit everyone. Were you aware for instance that right through the 1990s, property in some parts of London continued to rise ? Anyone who didn't buy in 1989 because property prices were "too high" would have been badly caught out in these localities.

It's really impossible to generalise.

As for the long term investment aspect, people have basically two choices: geared investing via a BTL or stocks and shares.Which do you think is more risky?Which do you think will make the better returns?