House Price Crash 3

cwcw

Woby_Tide wrote:

so in summary, prices will go up, prices will go down, house prices will boom, house prices will crash, it'll all happen at some point between 1970 and 2137, we're all doomed, renting is dead money, renting is great, pity the BTL, laugh at the BTL, my house in Lerwick is worth 3x what it was last year the market is booming, my house in lands End is worth half what it was last year the market has crashed. Look at the US, look at the Japanese. Look at the tea leaves. Debate over. Thread locked.

That's one of the funniest posts I've read - thanks!

What I was wondering about the "we're all doomed" brigade's view of the property market is what constitutes a "crash"? A lot of people say things like "could be as bad as the late 1980s/ early 1990s". I was only a little kid at the time, but was it really that bad? Looking at graphs, there was a short period where house prices fell by a few percent. They soon climbed back up to previous levels and started to boom again. My parents, like most people, just simply rode it out.

I'm obviously a bit biased, having just bought a flat, but I can only see prices going up in the long term, even if there is a minor "blip" like last time. Only those who have vastly over extended themselves will be effected enough to have to sell up and take a loss. We live in a small country with an ever expanding population. Demand is constantly going up.

The only situation that would really worry me is if interest rates tripled and consumed almost all of my income. If this ever happened I guess I would have to "transfer" my mortgage to the Bank of Mum and Dad, who offer a very competitive rate! It would be a case of surrendering independence Vs living off bread and water.

Having paid £135k for my lovely flat I would like to put it in writing here and revisit in 5 years time, hopefully to be proved right - it will be worth more than that by then. Let's see.

ManAtHome

cwcw wrote:

The only situation that would really worry me is if interest rates tripled and consumed almost all of my income.

You wouldn't worry if tax rises escalated, food went up. insurance, travel etc continued rising and wages were pegged to 1 or 2% (or frozen, or jobs offshored).

House prices are largely immaterial other than encouraging you feel rich and borrow more - you can always cash in and live in a tent I suppose. The real problem (as you pointed out re early 90s) is cashflow. This time round there are increasing problems even with people in work (and presumably getting pay rises) never mind those on fixed incomes - expect more pensioners in the nick this year over council tax.

Our (allegedly) vibrant economy will save us? Has been increasing around 3% a year - however, personal debt has more than doubled this, money supply over 3 times. The banks are already kicking up about the increase in bankruptcy and IVAs - once bad debt starts to really worry them, credit will become more difficult and rates will go up.

Ok, doesn't affect me...(?). Two thirds of the UK economy is dependent on consumption and has done sort of ok during the doubling of personal debt - what happens when this increase slows or stops? Probably similar to the early 90s but much worse as we're now more dependent on consumption.

So yes, the property market may well "carry on booming" but not all of the people in the properties may be so lucky.

BobProperty

cwcw wrote:

......A lot of people say things like "could be as bad as the late 1980s/ early 1990s". I was only a little kid at the time, but was it really that bad? Looking at graphs, there was a short period where house prices fell by a few percent. They soon climbed back up to previous levels and started to boom again. My parents, like most people, just simply rode it out......

A few percent? 20 something in one quarter isn't a few percent.
They didn't soon climbed back, it took 8-10 years.
just simply rode it out is fine if you can do it and it's what most people did. Unfortunately not everyone could and repossessions went seriously up in that time, leaving people in negative equity with mortgage companies sticking CCJs on them for the balance. Most people did ride it out, sufficient people didn't that it compounded a falling market. This time round people have 6 x income mortgages and a string of credit cards "maxed-out", which wasn't the case in the early 90's. Lending sentiment will over-correct when banks start suffering from debtors going bankrupt and only the most credit worthy will be able to get mortgages easily.

Alan_M_2

To back up Bob's post I was one of the people that did get caught in the 90's crash, this makes me pretty pessimistic about whats happening now as there is a feeling of Deja Vue.

In 1989 I bought a two bed terraced house for £72,000 (having negotiated down from £85,000), I was 19 years old, I had a £60,000 mortgage. I sold everything I owned for the deposit and was held up as a shining example of being sensible.

Three years later interest rates hit 15%, my mortgage and endowment was approaching £1,100 per month and my house was valued at £45,000. I couldn't keep up repayments, my parents weren't financially in a position to help me as they had their own monster mortgage, I couldn't sell the property to clear the debt (which was now increasing) as it wasn't worth what I'd borrowed.

If I could have afforded to ride it out I would have done, but the sums were so large back then that I just couldn't. I walked away with no property, no assets and £20,000 in debt, which stupidly I spent the next 10 years paying off. In hindsight I should have walked away and knocked them, as it made absolutely no difference to my credit record (even a couple of banking friends have since told mye I shouldn't have paid it back).

I'm 37 now, and I was very young when I bought, but there were hundreds of thousands of stories like mine at the time, not just a hand full.

There's now an entire generation of people from their early 30's and under that have no recollection of anything other than massive increases in property values, coupled with historically low interste rates and historically high levels of lending (in volume and in multiples of income).

I don't know which way the market will go, none of us do, but I have a terrible feeling about it, but then, I would wouldn't I. In my particualr case my house lost close to 40% of it's value

abaxas

I've decided to change my mind on this topic.

House prices will always go up... I am a fool for not thinking that they are an infinite money supply for the economy and those who buy will automatically be rewarded with expoential growth.

(NOTE if you said that about any other investment people would laugh in you face, but for some reason everyone appears to beleive that property is magical. Maybe if you plant some HPI beans you find a fat scotsman at the top of the beanstalk?)

mystic_trev

Excellent posting Alan M

The problem with many people buying today has not been helped by "the property !!!!!!" shows, as Martin calls them.Many now buying are looking at thier property as a gold mine and not a home, just one of the reasons this markets lost complete contol of its senses! Those and the recent BTL brigade could find they've been mining "fools gold"

westernpromise

cwcw wrote:

What I was wondering about the "we're all doomed" brigade's view of the property market is what constitutes a "crash"? A lot of people say things like "could be as bad as the late 1980s/ early 1990s". I was only a little kid at the time, but was it really that bad? ...Having paid £135k for my lovely flat

Just to hammer home Alan M's point, what happened in '89 was that interest rates pretty much doubled in the space of about a year. Simultaneously and of course in consequence house prices fell by around 40% in many areas.

So you can answer your own question - "was it really that bad?" by imagining the following by the end of 2007:-

- your flat's value falls to £81,000 and, over the next 5 years, drops further to about £70,000
- your neighbours, in properties twice the size of yours, are panic-selling them for £95,000
- interest rates rise to 9%, so your monthly mortgage outlay goes up by 80%
- the basis of local government finance is changed and your council tax quadruples.

That's not a prediction - that's just what would have to happen for it to feel like a repeat of 1989 - 1996. Of the above list, the last is actually already underway, the others I don't know about.

At one point in 1989, I worked out that my disposable income after paying the mortgage, the then rates, utilities, food, and travel to work, was 2/3rds of 1% of the gross. Yes, I was on £27,000 a year and I had £15 a month fun money left over after all the bills. I had less money than I had when I was 10 years old. And I wasn't even particularly geared up. Many people had it worse and were repossessed and bankrupted.

So what do you reckon - how bad would that be?

cwcw

westernpromise wrote:

Just to hammer home Alan M's point, what happened in '89 was that interest rates pretty much doubled in the space of about a year. Simultaneously and of course in consequence house prices fell by around 40% in many areas.

So you can answer your own question - "was it really that bad?" by imagining the following by the end of 2007:-

- your flat's value falls to £81,000 and, over the next 5 years, drops further to about £70,000
- your neighbours, in properties twice the size of yours, are panic-selling them for £95,000
- interest rates rise to 9%, so your monthly mortgage outlay goes up by 80%
- the basis of local government finance is changed and your council tax quadruples.

That's not a prediction - that's just what would have to happen for it to feel like a repeat of 1989 - 1996. Of the above list, the last is actually already underway, the others I don't know about.

At one point in 1989, I worked out that my disposable income after paying the mortgage, the then rates, utilities, food, and travel to work, was 2/3rds of 1% of the gross. Yes, I was on £27,000 a year and I had £15 a month fun money left over after all the bills. I had less money than I had when I was 10 years old. And I wasn't even particularly geared up. Many people had it worse and were repossessed and bankrupted.

So what do you reckon - how bad would that be?

Fairly bad, but if that's the worst of it then I could cope and ride it out until the market picked up again. I'd feel sorry for those who couldn't ride it out, even if they had vastly over stretched themselves.

I don't understand the 40% drops. Obviously there were such cases but the average price didn't fall that much at all. Look at this link: http://www.communities.gov.uk/pub/112/Table503Excel60Kb_id1156112.xls

The only drop was from 1991 to 1992, which was less than 2%.

It is also worth remembering that if inflation rises rapidly, so too will the average salary, albeit with a slight delay. When interest rates were sky high in a bid to control inflation, salaries were also increasing at a rapid rate.

I don't think anyone is naive enough to think that "house prices will always go up", as abaxas sarcastically puts it. However, property investments can only be judged over the medium-long term, and property has been a very good investment historically. If the worst has been a 2% average drop in one year then I would say it's still a pretty safe investment. I will also repeat the fact that we have an ever increasing population which is already densely populated, and a shortage in housing supply. It seems like some people on this board will only be happy when a crash does happen though. :rolleyes:

abaxas

cwcw wrote:

Fairly bad, but if that's the worst of it then I could cope and ride it out until the market picked up again. I'd feel sorry for those who couldn't ride it out, even if they had vastly over stretched themselves.

I don't understand the 40% drops. Obviously there were such cases but the average price didn't fall that much at all. Look at this link: http://www.communities.gov.uk/pub/112/Table503Excel60Kb_id1156112.xls

The only drop was from 1991 to 1992, which was less than 2%.

It is also worth remembering that if inflation rises rapidly, so too will the average salary, albeit with a slight delay. When interest rates were sky high in a bid to control inflation, salaries were also increasing at a rapid rate.

I don't think anyone is naive enough to think that "house prices will always go up", as abaxas sarcastically puts it. However, property investments can only be judged over the medium-long term, and property has been a very good investment historically. If the worst has been a 2% average drop in one year then I would say it's still a pretty safe investment. I will also repeat the fact that we have an ever increasing population which is already densely populated, and a shortage in housing supply. It seems like some people on this board will only be happy when a crash does happen though. :rolleyes:

Good post... however the average house price data was sadly skewed as nothing at the bottom end was sellling or even on the market. 100,000 of people who simply couldnt sell due to negative equity. Only 'decent stuff' was moving which made things look alot better than it was on the ground.

Quality always has value and will always sell. Who wants a 1 bed craphole when then can afford a 2 bed terrace....Who wants a 2 bed terrace when then can buy a 3 bet semi...

Housing averages are meaningless unless you are looking at trends NOT actual selling prices. They are polluted with too much crap data and hence can be discredited too easily.

mystic_trev

Agreed - the figs don't take into account the hundreds of thousands (like Alan M) who handed in the keys and walked away. Many of these properties were sold for a fraction of there value at Auction.I used to view some of them, many of the previous owners we're so distraught they'd gut them before leaving.