UK property - overvalued and poised for a correction soon?

dfdemello

Hi all,

Not wanting to get into a huge economics debate or scaremonger but a friend of mine emailed me (he now lives in Asia) and had a viewpoint about UK property and that it was overvalued and poised for a correction soon.

In a nutshell..."….it is a real conspiracy that property values and mortgage payments aren't factored into inflation calculations, otherwise interest rates would be 30%! Real incomes have not gone up 10 fold in the last 20 years, but house values have, so somewhere the rubber band has to give."

Gave me food for thought with my one BTL property....any views?

movieman

Gave me food for thought with my one BTL property....any views?

Other than that UK prices are absurd and that another couple of interest rate rises are likely to lead to a decade-long crash, not really.

I was looking around on the web at other countries a few months back and for the cost of half a terraced house in chav-town (i.e. one flat in a terraced house that's been converted into two flats) I could buy two detached houses in Texas, or a farm with a hundred acres of land in Canada... how can that be sustainable?

The only hope for people buying now is high wage inflation that destroys the value of their mortgage, but then that would lead to high interest rates so they'd be lucky not to be repossessed before their wages rise high enough to compensate. And when most people are competing with Chinese people on a tenth of their wages or Europeans on minimum wage, high wage inflation isn't too likely in the first place.

Xbigman

House price crash 8 anyone?

Everyone knows the UK housing market is overvalued and everyone knows it cannot go on.

The debate is really on whether it will crash or just plateau, and when.
Regards



X

movieman

The only way it will plateau is if we get 70s-style wage inflation so wages rapidly catch up with costs; prices would crash in real terms while staying flat or slowly rising in pound terms.

The only problem is, in that case interest rates would be around 20%...

furndire

The things that are throwing a huge spanner in the works is the Buy To Let market, more single/divorced people wanting their own homes and the large number of people coming over here to work in the lower paid industries - who don't want/expect to buy their own property, but are content to work for more than they get in their own country.
(I hope I do not sound xenophobic here, as I don't intend to - my dad was Polish)
First time buyers can't get on to the property - so have to rent - rents are expensive, thus preventing saving for a deposit for own house - so carrying on the circle. People coming into country seem to be prepared to rent 4 or 5 people to a house, - this keeps rents up.

I think if properties are to drop in price, it will be a much slower process and creep up on us like the slow strangulation of the High Streets.

talksalot81

I wonder whether people do generally know that the situation is not sustainable? Alot of those I know believe that prices always go up and that there is no real reason for it to stop... I personally do not believe that anyone appreciating the fundamentals can believe that, but it seems that many do.

As for whether we have massive wage inflation - I dont see it happening. It wouldnt stand up because I imagine others in the western world would demand like salary for doing the same jobs. So whilst such inflation may give the UK sensible income/mortgage ratios, it could very well lead to seriously low ratios elsewhere in the western world. Furthermore, if this did not happen and the high wages were restricted to the UK, we would lose all our competitiveness in the global market. We are losing out on manufacturing because china does it much cheaper, if our wages were higher across the board than those in other western countries, the companies would simply move to those countries where they would be getting the same skilled workers but at significantly lower prices.

I tend to analyse the situation considering the foundations first. If you see it that way, our salaries are just fine on a global scale, it is our house prices which stick out like a sore thumb. By matching HPs with salaries we would simply be turning one abnormal feature into two.

furndire

Companies cannot afford to give huge wage increases, and compete with other countries exporting goods to us at a lower price than we are able to manufacture for.
It is already shown by how many companies are downsizing, going abroad, or closing down(by bankruptcy/or just given up).

A lot of the BtL market has come about because people were disillusioned with the pension market, and at least what you pay into a property is eventually going to be yours - the same I suppose with buying your own home (though I think the ratios now are terrifying) what happens if these 4 or 5 times earnings loose their jobs. Saying that they will be no worse off, go bankrupt, and back on to the rent roundabout - at least they will have had a shot at buying (maybe making money in the long term) - not just paying for landlords property.

Gorgeous_George

furndire wrote:

The things that are throwing a huge spanner in the works is the Buy To Let market, more single/divorced people wanting their own homes and the large number of people coming over here to work in the lower paid industries - who don't want/expect to buy their own property, but are content to work for more than they get in their own country.

I can agree with your second and third points but BTL cannot be the cause of HPI.

more single/divorced people wanting their own homes adds to the number of homes required.

the large number of people coming over here to work etc. adds to the number of homes required.

BTL properties are usually let to families/people who would otherwise need to buy a home of their own. For whatever reason some people choose to rent. The effect of BTL is neutral on the house market.

As for the OP, prices are too high at the moment but perhaps they were too low 20 years ago. Somewhere in the middle is a fair price for houses. I think 3 or 4 times average wages is reasonable so a 2 bedroomed house should cost £75-£100K and add £20K per bedroom. add more for garages, gardens, location but subtract a little for less desireable areas etc.



GG

furndire

I think its the affordability of the rent which is a part of the problem. Renting property - expensive - unable to afford to save for a deposit to buy.
Don't you think that the cheaper end properties are getting bought by BtL, and thus taking them out of the hands of the first time buyers thus making them have to rent.
I am so pleased that I am not just starting out - its a jungle out there.

furndire

dfdemello wrote:

Hi all,

Gave me food for thought with my one BTL property....any views?

We have 4 BTL's, and building 2 more. Our finances on them are minimal, so staying put. I suppose it depends on how much you are paying out as a mortgage on your BTL, but as Gorgeous George has pointed out some people will always need to rent, and if your rent is right, you won't have a problem.
A house crash only affects you if you need to sell your house quickly. Long term I'd sooner have my money in bricks and mortar.

meanmachine_2

furndire wrote:

We have 4 BTL's, and building 2 more.

Let's hope Gordo taxes you till your pips squeak.