BoE's ability to kill the housing market

richdeniro

Hi All,

I'm not one who normally posts in this forum and am not as up to date on economic issues as some.

However I am currently looking to buy a property in South London although I am at the point of giving up and will continue to rent or possibly look at a shared ownership scheme as I think the last 12-24 months have put it out of reach now. I earn 35k pa, have a 40k deposit and strong credit rating.

My reason for this is I went to view this flat last week in Anerley, it was first listed at 220k...

http://www.rightmove.co.uk/property-for-sale/property-39303684.html

It was pretty grim, the inside would need a complete overhaul, i.e. new bathroom, kitchen, redecorating, etc. Not too mention the block itself wasn't particularly nice, thin walls, single glazed old fashioned windows, guttering falling down, etc.

My budget was 200k-ish and I thought as the seller wanted a quick sale I might be in with a chance.

It was an open house from 6-7pm, I got there at about half 6 and the place was rammed. Spoke to the agent and he said there would be no chance of getting a bargain as they had already had offers with some above the asking price. I called the agent today and it said it went for 250k in the end.

1 bed properties in the same block were 100k in 2010 and around 140k in 2012 so a huge increase in a very short space of time. My experience is that this is about right for the whole of South London at the moment.

Now my main reason for this post is something that my friend who is a financial advisor said to me earlier this morning when I was telling him about the flat: Remember with housing the Bank of England can kill the market in a day at any time. They just make a big increase in the reserves that financial institutions need to keep or directly restrict mortgage availability. Something will happen very soon I am sure.

I have no idea what he means by that and wondered if anyone could shed some light? I am not naive and know the housing market is a vote winner for governments. I don't think there is any political will to cool the housing market. It's the biggest vote winner there is, people feel richer if their house is going up in value even if they aren't getting pay-rises. Almost every housing policy that is announced is designed to push prices further up.

Plus I would imagine the majority of MPs, those in government and the people they represent are landlords themselves and have no desire to see the property market drop.

mwpt

Sorry to hear of the troubles buying. In my opinion, but only mine (some people strongly believe differently), this shows the bad side of cheap credit costs. If interest rates were 7% that place would still be about £140k maybe a bit more and would have been well within your budget and lending multiples.

Perhaps something you could look into is the 40% HTB interest free equity loan scheme in London. It's a pity for you that it's only on overpriced new builds though. Essentially you get 40% towards the purchase price, interest free for five years, then must start repaying after that time. The value of this loan goes up with the value of the house (if you sell), so that isn't exactly ideal, but importantly, it also goes down if the house drops in value. So if you need to sell for less than the value you bought it at, the government loses out, not you. Essentially what you have is a hedge against prices dropping and rising.

It seems a little too good to be true (except for only being on over priced new builds), so I'm not sure I've got it completely correct. Maybe others could confirm.

EDIT: Oh, and to respond to the part about the BoE killing the housing market. The fact that government will be offering 40% interest free loans that they make losses on in the event prices decrease, kind of shows the direction they want the market to take.

cells

you need to forget about prices of yesteryear and look if it makes sense for you today

If the cost of that flat or an alternative is cheaper than renting it might be a good idea. That something has gone up in price could well mean it was under priced last time you looked rather than overpriced now

PasturesNew

There is a deadline many BTL LLs are trying to beat. It's a huge rush on to get a place bought/completed by the first week of April.

Then it'll quieten down. You'll have less competition.

Then things will go a bit quiet, then sellers will reduce their prices a bit because there are less landlords rushing to snap up anything with 3.5 walls and half a roof.

PasturesNew

richdeniro wrote: »

They just make a big increase in the reserves that financial institutions need to keep or directly restrict mortgage availability.

Put simply, in VERY oversimplified terms, this means:

If I put £100 in the bank, into savings, the bank then has that available to lend out.

But they can't lend it ALL out; what if I walk in tomorrow and want my £100 back?

So they keep a RESERVE. There is a magical figure that is the minimum they keep handy "in case". In case of all sorts of events.

The bank might, say, today, be prepared to lend £90 of that £100. But, tomorrow, they might suddenly say, "No, just £80".

Reducing how much people can borrow has an effect on how much people spend on anything they buy.

But ... your mate was really just trying to sound all knowledgeable and impress you. You don't really need to know/worry about that... except that it exists.

Graham_Devon

When I see flats like that at those prices, it's just a reminder of how absurd things have got.

ukcarper

Graham_Devon wrote: »

When I see flats like that at those prices, it's just a reminder of how absurd things have got.

That's London for you move out to Woking and you could find a flat for what he can afford.

westernpromise

The BoE is not about to do anything that kills the housing market. The Tories were in power last time there was a housing meltdown and it did them damage some of us still remember 25 years later. I remember, for example, my disposable income falling to around two-thirds of one per cent of the gross, i.e. if I was on £36k a year my disposable income at one point was £20 a month. If I needed a plumber it was a disaster. This was having bought a flat at 3x salary with a 15% deposit.

The BoE is likelier to try to engineer a soft landing. What has happened so far has tended that way - the mood has been shifting against _leveraged_ property investment for some years now. Unleveraged not so much. But the aim seems to be to try to take some bidders out of the market and to provide assistance to buyers that exiting landlords can sell to.

The BoE may be successful, it may not; nobody knows. The property market is a series of spikes followed by corrections followed by more spikes. I have just re-read a very cogent, much upvoted post on the Motley Fool that persuasively argued UK property was going to crash hard for 10 years starting next year. It was written in 2005.

I think it's correct that there is a rush to buy in before another 3% is added to the stamp duty for investors or second-homers. I wouldn't, personally, pay £30k over the odds to save £6.6k, but a certain class of landlord can't remember 2010 never mind 1989, and thinks prices can only go one way. In fact we have had three property busts since 1980, but they matter only to short-term speculators who want to get in and out quickly.

I would keep looking and I would go for a lesser space in a better location rather than the reverse; I would also take a shorter mortgage term if possible with a fix, so that I could make serious inroads into the capital over say five years.

If you've put £40k down, borrowed £140k to buy a £180k property and you pay off 20% of that loan, then you owe £112k and are resilient to a price decline of 38%. I.e. if the value fell as low as £112k you could still sell up and have enough to pay off the mortgage.

Then sit tight and make it your home for 5 years.

Good luck.

padington

The Brexit referendum will scare people off until the vote. If we stay in things will heat up again like when the tories won the election. If we vote to stay out anything could happen, probably price falls ( but it won't happen unless a very unusual event swings public opinion IMO ).

If you could find work looking at Hastings, Bristol or Brighton might not be a bad alternative.

westernpromise

padington wrote: »

The Brexit referendum will scare people off until the vote. If we stay in things will heat up again like when the tories won the election. If we vote to stay out anything could happen, probably price falls ( but it won't happen unless a very unusual event swings public opinion IMO ).

If you could find work looking at Hastings, Bristol or Brighton might not be a bad alternative.

Brexit is hard to call and will likely trigger volatility. The City would benefit from Brexit in that it wouldn';t have ESMA !!!!!!ing up the markets and we wouldn't have to bother with cr ap like MIFID II, which would benefit, but on the other hand there'd be uncertainty as to London's ability to access European markets from outside the EU. So one can see potential for upswings and downswings in house prices depending on whether all those City jobs stay or leave.

padington

westernpromise wrote: »

Brexit is hard to call and will likely trigger volatility. The City would benefit from Brexit in that it wouldn';t have ESMA !!!!!!ing up the markets and we wouldn't have to bother with cr ap like MIFID II, which would benefit, but on the other hand there'd be uncertainty as to London's ability to access European markets from outside the EU. So one can see potential for upswings and downswings in house prices depending on whether all those City jobs stay or leave.

The market won't like the uncertainty though and until things are settled house prices will weaken in my mind. Could be wrong.

If I'm correct, staying in will offer immediate reassurance to the market and wind will blow in the sails once again.

Leaving the EU will be a massive unknown unknown. I imagine partly because of the extra work it will cause the government, they will fight so hard against it, it just won't happen.

Also I imagine a whole bunch of dirty ticks will be awaiting should it look like we are minutes to midnight to vote to leave.

If April to June doesn't show weakness however, I think it will be a very strong signal for another solid year of House price rises.