House Price Crash Discussion Thread

Vincenzo

Generali wrote: »

Yield is current income divided by current market value and allows a standardised way of comparing investments.

If you want to use price paid then that's fine but that's also not yield.

I agree with you that rents are rising BTW and I suspect that they will continue to do so until the credit crunch hits the real economy in a while (probably 6-12 months at a guess) at which point I also suspect that they will start to fall pretty quickly as housing benefit rates get capped to try and cut a soaring welfare bill.

I take it you were referring to the previous poster on yields? As I said I was referring to the 'Initial Yield' i.e. current market rent over current capital value. Reversionary or running yields are little help to anyone but the individual holding the asset.

Do housing benefit rates have that much impact? I would certainly not want to rent out property in that sector.

Laughing_Man_2

Vincenzo wrote: »

Carolt - I would be happy to answer that. I have one house which my family and I live in and one property we let out. Although I have never bought to let. The flat we rent out was our previous main residence. We also had another flat (previously my wife's) which we sold a couple of years ago to fund our house purchase and refurbishment.

So I am far from a buy to let investor. My intention had always been to invest in more property long term but as I keep saying I am watching and waiting to see what will unfold.....

The yields on residential property interest me particularly at the moment. As Generali points out if prices fall and rents continue to rise, yields will increase. What I am uncertain of is what happens when we get to a point of say 10% yields? In essence property will look cheap (to investors). Does this mean everyone piles back in (assuming available finance) and prices start rising again? Certainly this is what happens in commercial property markets.

Anyone care to comment?

O.K I'll bite, this argument isn't nearly as devastating for us bears as you seem to think.

I don't even need to refer to economics. It's all about sentiment you see. Everyone I know, pretty much, has felt like house prices can only go up for a long time now. It's obvious right? Supply and demand, yeah? do you know what my place was valued at/ what next door got? etc.

So deeply held is this belief that tens of thousands have bought into the property pension, ridiculously accepting rents that do not even cover mortgage interest; because you can't go wrong with bricks and mortar.

When a crash is widely reported, and BTL'ers are shown to be foolish amatuers losing huge sums (take a look at todays Guardian, for example), this sentiment will be gone. The fact is that by the time yields reach 10% everyone will believe the only direction for prices is down, and that only a fool buys today what will be worth less tomorrow. If you look at the Halifax graph you see the troughs fall a long way under the trend line and this is why: crash pessimism is every bit as unreasonable and blind as the bubble optimism. Of course you are right that in the darkest days there will be bargains to be had, but they are some way off yet and very few will recognise them.

This isn't just my personal opinion either, if you're truly open to persuasion take a look this: http://www.econ.ox.ac.uk/members/andrew.farlow/Part2UKHousing.pdf

Andrew Farlows writings are what first persauded me that the boom is unsustainable.

Generali

Vincenzo wrote: »

Do housing benefit rates have that much impact? I would certainly not want to rent out property in that sector.

TBH if my fears are correct then any landlord except at the very top end is likely to face this problem.

The recession in the early 90s was caused by interest rates being hiked to drive out inflation but it was prolonged by a credit strike - banks refused to lend to small businesses for the most part or called in their debts and so they went bust.

What's going on right now looks far worse to me than the early 90s which in turn implies to me a worse recession.

If we have a big recession then firstly more tenants will be forced onto housing benefit and secondly (due to the rules on mortgage interest being paid by welfare changing) more people that lose their jobs will be reposessed and they will be looking to rent with HB paying the bills.

If you're a landlord in a competetive market trying to rent a house, what do you do? Not rent your house out at £600 pm to a person in work or actually rent it to someone on housing benefit for £550pm?

Vincenzo

Laughing_Man wrote: »

O.K I'll bite, this argument isn't nearly as devastating for us bears as you seem to think.

I don't even need to refer to economics. It's all about sentiment you see. Everyone I know, pretty much, has felt like house prices can only go up for a long time now. It's obvious right? Supply and demand, yeah? do you know what my place was valued at/ what next door got? etc.

So deeply held is this belief that tens of thousands have bought into the property pension, ridiculously accepting rents that do not even cover mortgage interest; because you can't go wrong with bricks and mortar.

When a crash is widely reported, and BTL'ers are shown to be foolish amatuers losing huge sums (take a look at todays Guardian, for example), this sentiment will be gone. The fact is that by the time yields reach 10% everyone will believe the only direction for prices is down, and that only a fool buys today what will be worth less tomorrow. If you look at the Halifax graph you see the troughs fall a long way under the trend line and this is why: crash pessimism is every bit as unreasonable and blind as the bubble optimism. Of course you are right that in the darkest days there will be bargains to be had, but they are some way off yet and very few will recognise them.

This isn't just my personal opinion either, if you're truly open to persuasion take a look this: http://www.econ.ox.ac.uk/members/andrew.farlow/Part2UKHousing.pdf

Andrew Farlows writings are what first persauded me that the boom is unsustainable.

Laughing Man - you make a valid point about sentiment and its effects on the market booms and busts. As you have probably guesed by now I am not so pessimistic about where the market will end up over the coming years. I am sure we can both agree that only time will tell...

I am also sceptical about the number of people who have BTL investments that do not cover interest payments. I fully accept there are lots of them out there but I am not sure what percentage they make up of the whole. People have been buying property to let as invesments for decades. Granted many people jumped in of late but I have not seen any figures to show that these are the people that dominate the market.

I would estimate that (save for the new build investment club rip offs) anyone who bought property to let in the last 2 years or so are more likely to struggle with rental coverage than those who bought before.

Generali

Vincenzo wrote: »

Laughing Man - you make a valid point about sentiment and its effects on the market booms and busts. As you have probably guesed by now I am not so pessimistic about where the market will end up over the coming years. I am sure we can both agree that only time will tell...

I am also sceptical about the number of people who have BTL investments that do not cover interest payments. I fully accept there are lots of them out there but I am not sure what percentage they make up of the whole. People have been buying property to let as invesments for decades. Granted many people jumped in of late but I have not seen any figures to show that these are the people that dominate the market.

I would estimate that (save for the new build investment club rip offs) anyone who bought property to let in the last 2 years or so are more likely to struggle with rental coverage than those who bought before.

I can't remember whether the average deposit or mortgage on a BTL place bought on a mortgage is 40%. Either way there is quite a cushion there for the majority.

brit1234

Vincenzo wrote: »

Laughing Man - you make a valid point about sentiment and its effects on the market booms and busts. As you have probably guesed by now I am not so pessimistic about where the market will end up over the coming years. I am sure we can both agree that only time will tell...

I am also sceptical about the number of people who have BTL investments that do not cover interest payments. I fully accept there are lots of them out there but I am not sure what percentage they make up of the whole. People have been buying property to let as investments for decades. Granted many people jumped in of late but I have not seen any figures to show that these are the people that dominate the market.

I would estimate that (save for the new build investment club rip offs) anyone who bought property to let in the last 2 years or so are more likely to struggle with rental coverage than those who bought before.

What will effect all buy to let landlords are going to be far higher mortgage repayments and charges over the next few years as the credit crunch continues. However what is uncertain is what will happen to interest rates after that. I believe they will go higher back to traditional levels as living standards improve in the East of the world and commodities are increasingly fought over increasing inflation.

On top of that equity in all investor portfolios will be reduced as prices continue to fall to meet the lending standards. So defendant on when the investor bought their property it will be a lot harder for them to use the falling equity to purchase more properties.

I can't see it looking good for investors for many years apart from those who bought a decade ago with repayment mortgages.

Its common sense really.

Lotus-eater

Laughing_Man wrote: »

So deeply held is this belief that tens of thousands have bought into the property pension, ridiculously accepting rents that do not even cover mortgage interest; because you can't go wrong with bricks and mortar.
everyone will believe the only direction for prices is down, and that only a fool buys today what will be worth less tomorrow.

If anyone remembers it, this is exactly what happened last time, it wasn't that houses couldn't be afforded, it was that everyone was scared to buy.

WTF?_2

Those who bought when it was affordable and consequently took the historically safe mortgage level on (90% LTV/3.5x salary) should have few problems barring unfortunate personal circumstances.

However, for most people out there it's been a long time since you could save 10% of the value of the house as a deposit and get a mortgage of only 3.5x your salary to pay the rest. Most average people who bought in the last 3 years will have borrowed considerably more than they can easily afford to repay and are highly vulnerable to a house price deflation.

Really, these people should never have bought but a collective madness seems to have seized the public psyche where suddenly it became good to borrow massive amounts of money to pay 2-3x as much for a house as you would have a couple of years back. If food or fuel prices had rocketed by as much everyone would have been complaining but in an example of perverse logic they thought it was great that the cost of buying the roof over your head increased massively.

Such was the availability and cheapness of credit to the entire population I think the public lost sight of the value of money. In the last 5-6 years just about everyone could have anything material that they wanted ... as long as they put their future in hock to pay for it. We're seeing that all unwind now.

WTF?_2

Generali wrote: »

I can't remember whether the average deposit or mortgage on a BTL place bought on a mortgage is 40%. Either way there is quite a cushion there for the majority.

But how many of those deposits were obtained by remortaging an existing property?

There are an awful lot of 'investors' out there with 'property portfolios' which have been obtained domino-style. They'll also start to serially fail, domino style.

Pobby

Lotus-eater wrote: »

If anyone remembers it, this is exactly what happened last time, it wasn't that houses couldn't be afforded, it was that everyone was scared to buy.

I went through the last pop in the housing market and felt some of the pain.I said that at least we have all learnt from this and it would never happen again.Oooppss,got that a bit wrong ,didn`t I!