UK property crash

MFW_ASAP

I'm currently enjoying the stockmarket correction. The FTSE is currently behaving like the tide is going out, each time the wave lap up the beach, they are a little further down the sand. I can see the FTSE under 6000 within the next few months. Meanwhile the turmoil in the markets is great for day trading - I'm over £10k up with Tesco shares alone.

As far as house prices are concerned, I've no real interest - I've bought my dream home and I'm just content to renovate it and then live there for another 25 years.

Everything is going to plan

Crashy_Time

Wi88le wrote: »

Don't know if the word crash has been appearing more but sentiment certainly seems to be slowly changing against house price rises and going for a drop in prices.

We may yet get to see how the Sibley-Mctavish house price guarantee works.


Yes, that will be interesting.

Mallotum_X

So when is the next crash going to happen...

Generali

antrobus wrote: »

Eh?

By definition, the payment of interest involves the transfer of money from people who don't have money to the people that do. I struggle therefore to see by what mechanism low interest rates would drive increasing income inequality.

In any event, incomes have become less inequal of late. According to the ONS income inequality is now at its lowest level since 1986.

My opinion is that income inequality should decrease as interest rates fall as unearned income, mostly earned by the rich, falls.

However as interest rates fall, asset prices tend to rise as the income from assets becomes more attractive and the 'cost of carry' (the cost measured by interest payments or interest forgone of holding an asset) becomes lower.

That theory seems to be borne out by the ONS' s research you quote.

cells

Bubble_and_Squoccupancy_ra4801 wrote:

a large chunk of that demand was foreign money, which has now dried up.
if you look around stratford you'll see hundreds of cheaply built new builds going up. the first lot sold off plan before a single brick was laid. the current lot are having their prices cut even though they are not due for completion for several months (years in some cases). its a classic building bubble. there is no prospect of finding enough people to live in them, let alone buy them.

England has a higher occupancy rate than France Germany Spain Ireland etc suggesting there are plenty of people who would very much like to live less densely but they cannot as there is no additional homes to allow the occupancy rates to fall.

To put things in perspective for the UK to live as densely as french we would need 3m additional homes today

cells

Generali wrote: »

My opinion is that income inequality should decrease as interest rates fall as unearned income, mostly earned by the rich, falls.

However as interest rates fall, asset prices tend to rise as the income from assets becomes more attractive and the 'cost of carry' (the cost measured by interest payments or interest forgone of holding an asset) becomes lower.

That theory seems to be borne out by the ONS' s research you quote.

The only way asset prices would increase with lower interest rates is if there is no way to expand the asset.

in Germany house prices have been fairly flat in nominal terms for a decade even though interest rstes have fallen by more than half. The reason is simple they continue to build 200k homes a year even though they have a static population and already have the highest number of homes per capita in western Europe.

If anything lower rates should equal cheaper assets as business loke house builds interest cost falls so should theor sale price

Generali

cells wrote: »

The only way asset prices would increase with lower interest rates is if there is no way to expand the asset.

in Germany house prices have been fairly flat in nominal terms for a decade even though interest rstes have fallen by more than half. The reason is simple they continue to build 200k homes a year even though they have a static population and already have the highest number of homes per capita in western Europe.

If anything lower rates should equal cheaper assets as business loke house builds interest cost falls so should theor sale price

My theory, weak as it may be, is that increasingly assets are starting to behave more like bonds. I suspect that is happening as baby boomers head towards retirement and are looking for income rather than asset price growth.

As a result, what really matters when pricing lots of assets is how the risk adjusted income compares. Prices of lots of assets should fall as interest rates rise. I suspect that commodity prices have gone first as they are most sensitive to interest rates as they pay no income at all. As QE has gone, an interest rate rise in effect, so commodities have fallen in value. Stock markets haven't exactly gone through the roof in 2014 either.

cells

lalman wrote: »

I find this topic really interesting - I read a lot on this topic and always find that both sides of the view are so emotionally involved.

This is my perspective.

1. The argument I keep hearing and I agree long term with is 'we don't build enough property in the UK'. The balance is maintained via demand and supply - higher prices, more supply eventually comes along... very much like the oil market and every other market that's ever occurred. Property due to regulation in the UK takes longer to build...
2. Property is linked to credit supply in the short term. We have just had a cut in the credit supply via tighter affordability thresholds.... this will dampen demand.
3. Opportunity cost - there is a real lack for alternatives for money at the minute. Holding property instead of selling it isn't a terrible investment and the cost for this isn't great... for example, I looked at a property the other day and the seller didn't want to negotiate even though it was on the market for 6 months... the lack of opportunity cost for this seller and the fact money is realtively cheap... probably prevents the market from reducing in price.
4. Probably most importantly... when interest rates are low, asset prices and income inequality is high. We are seeing that now. Will interest rates rise? My personal opinion is that there is just too much debt in the system still... there isn't incentives for people to reduce it/ indivduals can't afford too... and although people say the central bank is independent... its not... and no one wants to be responsible for kicking people out on the street even though the rest of the economy probably would benefit from a re-pricing of money.

I don't know whether there is going to be a crash, but I am not basing my investment decisions on whether property this or in 5 years will drop 30%-50% etc. You can't... timing for investments is practically impossible...

Timing is not impossible for something like housing because the factors are well understood and easy to project.

these would primarily be

population growth
existing housing stock
and new housing coming onto the market


so for instance we can say over the next 10 years for the UK we will see +5m people and +1.5m homes. We have an occupancy rate if 2.35 now and that will increase to 2.40.

The conclusion is easy to draw. More demand than supply and an increasing occupancy rate = higher rents and prices.

compare that to say Germany.

0 population growth (maybe a fall of cirxa 1m)
+2m homes
Current occupancy rate of 2.00 will fall to 1.90
Likely no growth in real rents and prices and possibly a fall

cells

Generali wrote: »

My theory, weak as it may be, is that increasingly assets are starting to behave more like bonds. I suspect that is happening as baby boomers head towards retirement and are looking for income rather than asset price growth.

As a result, what really matters when pricing lots of assets is how the risk adjusted income compares. Prices of lots of assets should fall as interest rates rise. I suspect that commodity prices have gone first as they are most sensitive to interest rates as they pay no income at all. As QE has gone, an interest rate rise in effect, so commodities have fallen in value. Stock markets haven't exactly gone through the roof in 2014 either.

If supply of homes was like supply of say cars, that is to say we can easily produce more or less, then a fall in interest rates would have no impact on price whatsoever.

Instead rents would fall.


eg lets say a 100k house now yields £5k net rent with 5% interest rates.
you suggest that if rates fall in half to 2.5% then prices will be bid uo to £200k for the house is correct for what we have now (very very restricted supply)

Lets say it costs a builder £100k to build a house. More than £105k and they buuld as maby as you want. Less than £100k and they build none.

if interest rates fell then yes lrices would go up to £105k and be capped there as supply is hogh and very rapid. Instead of prices goig up, net rents would go down. In this example bet rents would fall to £2.5k rather than prices increasing to £200k

in both cases it will hold true that property yields 2.5%


I think we will clearly see this in nations with good supply and nations with poor supply. Relatively speaking prices in the UK will go up while rents in france will go down so that in bith countries yeilds fall

Bubble_and_Squeak

"Demand for UK mortgages fell the most since 2008 in the fourth quarter of last year, the Bank of England said on January 6."