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UK property market ‘on the brink’?
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Here we go again.
The saga of two tales.
What the headlines says and what the report/expert/survey actually says.
In this case it’s the latest IMF report, which does NOT say, as the Daily Telegraph’s headline reports, that UK property prices are ‘On the Brink’ or that there is the ‘spectre’ of a ‘crash’. But there’s no denying that words like ‘Brink’, ‘Spectre’ and ‘Crash’ do make emotive headlines.
We’ve been through this before, and by now most Property Secrets members – at least those who’ve been around a while - know the score only too well: Read between the (head) lines!
Even so, the IMF report does make for fairly sombre reading. And yet, when you look a little more closely, AND consider how often the experts have been wrong before, perhaps it’s not actually so grim.
Even economist Roger Bootle, who famously forecast a property price crash several years ago and who now admits that he got it wrong, is this time, in a piece also in the Daily Telegraph, forecasting there will be no crash.
Model based predictions
As usual with organisations like the IMF, the dangers it highlights for the UK property market, are based on an economic model. That model leads to the conclusion that UK property prices are ‘overvalued’.
The IMF makes the point that if there is a sustained credit crunch then there will probably be a property price correction in the UK and a number of other markets. That’s pretty much received wisdom. If credit is less freely available then the price of an asset like property is bound to be affected. But a crash?
Will there be a sustained credit crunch? The IMF clearly doesn’t know and so wisely doesn’t say.
What it does say is that since 1997, UK property prices have risen by 50% MORE than its economic model for forecasting house price growth says they should have.
So, are to conclude from this that prices are indeed overvalued, whatever ‘overvalued’ actually means – or that the model is flawed?
In fact the model does seem a bit limited. It’s based on rises in wages and on economic growth. Aren’t there some fairly fundamental factors missing – like supply and interest rates?
Actually, the IMF agrees that there probably is.
Supply not considered
It admits there is "considerable uncertainty" about its estimates, because its model does not include factors such as constraints in the supply of housing.
But, surely that’s one of the key drivers of price growth in the UK market?
It also points out that in markets like the UK ‘some cooling seems desirable, if it does not go too far too fast.’
Gradually, then, we can see that this is not the cataclysmic forecast many of the headlines would have us believe.
In fact, there’s more.
A lack of supply could well continue to sustain property prices in the UK.
And the IMF adds that the UK and other European property markets are simply not facing the same problems as the market in the US because sub-prime mortgages were never sold as aggressively.
So, all in all, there is a risk of a correction in the UK, there is no doubt about that. Maybe some softening of prices is actually a good thing, as the IMF says.
Affordability ceiling
Certainly it’s inevitable that a market that has risen as fast and as far as the UK’s will reach an affordability ceiling sooner or later and possibly overshoot. That ceiling appears to be now.
That means some people will find it either hard to cope with their mortgages or impossible to buy into the market. The latter group will rent for longer.
But does all this add up to a crash? Hardly!
Lack of supply is not a driver of price growth in itself, of course. It’s one component. The other is demand. Demand, that is, in the sense of willingness and the ability to pay for something.
And once an affordability ceiling is reached – affordability being a combination of salaries and interest rates versus price – then no amount of supply shortage will make prices rise.
But, again, this does not spell a crash. A slow downward movement in some parts of he market for a year perhaps, while affordability – again, that combination of salaries and borrowing rates – catches up with prices, or meets them on their way down.
A few years ago, professor Bootle forecast a 20% fall in property prices. Since then, he says, he’s been forced to eat humble pie. Now, he says he may be able to stop swallowing that pie.
But even he says there will be no ‘crash’.
‘So is there going to be a housing market "crash"? No. Stock markets may crash but housing markets don't.’
Some of those who went into serious negative equity in the 90s might feel differently about whether markets can crash or not.
Why markets crash
But, they don’t crash just because they are over-valued. They crash because people are forced to sell, usually as a result of mortgage payments suddenly rising to levels that are beyond their means, either because of unemployment or sudden and steep rises in interest rates.
This is the case in the US where sudden rate rises in the sub-prime market when teaser rates come to an end cause monthly payments to shoot up. For people who have no creditworthiness in the first place and many of whom – let’s be generous here – ‘exaggerated’ their income, what incentive do they have not to walk away?
This is not the scenario in the UK, where the sub-prime market has not been anything like as irresponsible as in the US.
Of course, no one can sensibly argue that prices in many parts of the UK do not look like they are going to at least stagnate for a while, or maybe just creep up for 12 months or so. Nor can anyone argue that if there is a serious credit crunch, property prices, pretty much everywhere, will come down.
But is a sustained crunch over more than a few months really likely? Possible, of course. But likely?
It’s doubtful. Sure, many banks who took risks previously will take less risk in future – or, more accurately, they will price that risk much more highly.
But banks are there to lend, that’s what they have to do. And, so long as there is competition in the market, they will have to battle for business.
So, yes, the UK market is very probably in line for some slow growth in parts, in other parts some falls in price and still others zero growth. But six months, maybe 12 months down the line, this scenario could well all look very different indeed.
Let’s not forget the big picture. This blog is all about Max Growth after all. Property markets that will rise 200% in value in a decade.
Will parts of the UK market still live up to that measure of success? 200%? In ten years?
Probably not.
But ten years from now – and that’s a sensible time frame for the serious investor? The credit crunch is likely to be a distant memory. And I for one certainly won’t be betting against the UK market doing exceptionally well.
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POSTED BY
ROBIN BOWMAN
ON
THU 18TH OCTOBER
AT
22:13 GMT
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UK PROPERTY MARKET ‘ON THE BRINK’?
Hi Robin
Yes, you are right - we've been down this route of 'crash' prediction many times before. And yes, Roger Bootle did get the forecasts badly wrong. Does he say why? That would be interesting...
Equally, whilst we can discuss that it doesn't matter over the long term - I do think this topic matters as it is the basis from which you can develop your property investment strategy going foreward.
In fact, this is the topic of the key note talk I'll be giving at the Property Secrets conference on 17th Nov (see http: / /www .propertysecrets .net /0698 /conference .html)...
I've not yet writing my speech - as I want to make it as up to date as possible - but I'm going to try to explain why forecasters got it wrong and what we can say about the future!
One key thing is that the inflation reducing impact of Globalisation is reducing (if globalisation means outsourcing to China!).
However, if there are new countries and contients (South America, Africa, parts of Asia) that are coming on stream, then there might still be some inflation busting benefits yet in globalisation.
A lot will depend on what the central banks will do and how they do it. There is a lot of blame being laid at Alan Greenspan's door (ex-Fed chairman) for reducing interest rates too low (1%) for too long and that this is the real cause of the US housing problems.
Curiously, a similar thing did not happen in Europe nor the UK - partly because the Dollar currency was strong enough to stand the super low interest rates - but European currencies were not.
So, I think this is one of the key reason the US housing problem will stay within the confines of the US.
At the end of the day, this always comes back to economics - and latest predictions is that the housing slow downs in Ireland and Spain will reduce GDP growth by between 2 and 3%. But that even in a worse case scenario, both countries will avoid recession and therefore, will avoid severe increases in unemployment and therefore, there will be no crash.
The question then becomes - 'okay, I get that - but what should I do with my existing portfolio and should (or how) should I continue to invest?'?
Cheers
Neil
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POSTED BY
NEIL LEWIS
ON
MON 22ND OCTOBER
AT
16:33
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ON THE BRINK?
You’re right, of course, Neil. This is the subject of inescapable interest.
The point I would make though is that it is the broad predictions – those, as you imply, that are related to economic fundamentals and trends long-term that matter. And, of course, there are sensible things to say in this area. Otherwise, we tend to have to fall back on the standard technique of economics pundits everywhere with their ‘On the other hand’ approach.
It’s certainly the generally held view that China’s effective exporting of deflation may have peaked – but I don’t personally think that is the be all and end all of what globalisation is about.
There’s a long, long way to go before global markets come into anything approaching balance.
One gripe the US (and Europe) has had for years is the way China keeps its currency artificially weak. If it floated tomorrow, how much would it appreciate, I wonder. 30% has been mentioned. Of course, China has stubbornly resisted US appeals to revalue the yuan.
One of the consequences of the weak and weakening dollar is that the US is getting its wish – the country’s exports are suddenly very good value. The yuan has suddenly strengthened against the dollar – even if that effect has happened because of a weakening dollar, not a strengthening yuan.
So US imports will slow. The domestic economy strengthens and the trade deficit falls. US exports were up nearly 13% in August compared to last year.
Does it matter what happens in the US – not the US housing market, but the US economy? I think so.
And China may not have much more to give when it comes to keeping global inflation down with its ultra low labour costs, but let’s not forget it has a very rapidly growing consumer market of its own, with an estimated ten million becoming ‘middle class’ every year. The dream of selling all of them a bar of soap and getting rich has long gone. Nowadays, they want to buy an expensive education at a Western university, a Merc and an apartment!
And that’s without even mentioning India!
So, there’s plenty more to come. And I certainly think this all does matter for property investors because it will drive growth globally. As you say, Neil – it’s all about economics.
I look forward to your keynote speech at the Property Secrets conference on 17th Nov ( http: / /www .propertysecrets .net /0698 /conference .html ).
Cheers
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POSTED BY
ROBIN BOWMAN
ON
TUE 23RD OCTOBER
AT
09:54
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US EXPORTS
Hi Robin
I picked up that US Export figure too - it is a major leap - and will solve the US deficit pretty quick too!
Clearly, this credit crunch will strengthen the world economy by working through some of the inbalances and creating a more stable platform for future growth.
Equally, I think the big question is whether competition still exisits? If it does, then the 'no longer so cheap' factories will simply move from teh expensive (coastal) areas of China to cheaper ones (in the interior) or move to other low cost centres.
Therefore, our future prosperity relies on competition and the drive to make money.
And I don't know how to measure that! All I can say is that I don't see any reason why a credit crunch would make hungry entrepreneurs any less hungry?
Cheers
Neil
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POSTED BY
NEIL LEWIS
ON
TUE 23RD OCTOBER
AT
16:44
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CRASH & POPULATION BOOM
Hi all
I assume the doomsters also fail to pick up on headlines that are likely to cushion any downward pressure on houses. Todays BBC article read
"The population of the UK is set to increase by 4.4 million to 65 million by 2016, according to new projections.
The Office for National Statistics (ONS) estimates that 2.1 million of the overall rise can be put down to immigration alone.
Further projections say the population would reach 71 million by 2031 and 77 million in 2051".
I woonder where all these people will live?
Pete
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POSTED BY
PETE B
ON
TUE 23RD OCTOBER
AT
21:18
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STATISTICS
I dont believe these population statistics for one minute - a joke, spin to prop up the housing market by desperate people who have overleveraged into property.
It is affordability that dictates the price of housing not population. IF these statistics are correct this will mean MASSIVE increase in state costs, BENEFITS, schooling etc. The rebirth of state housing in a massive way. I remember reading that the government has decided to start building social housing once more (have to find that article).
These immigrants will NOT prop up the housing market. EXCEPT where sentiment within the BTL community is concerned - perhaps fewer will try to struggle through the next few tough years.
But then this is only real if those statistics are correct .... which they are not - as time will show.
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POSTED BY
RICHARD
ON
WED 24TH OCTOBER
AT
07:24
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STATISTICS
These figures are PROJECTIONS - in their nature are always WRONG, 70% of the population growth is based on CONTINUAL immigration. BUT where will these people come from?
Not Poland / Romania - the two prime candidates, but these two countries are booming like never before the people flow from these countries will slow and then reverse.
Dont forget that the average Brit is fleeing these shores like never before.
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POSTED BY
RICHARD
ON
WED 24TH OCTOBER
AT
07:49
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YOU MUST BE RIGHT
Thanks Richard for putting us all right once again. I must switch off the news, and turn to you for all my sources of information...!
But how do you know how many people have moved to the UK in the last 5 years, when the Govt has not properly recorded this?
Chris.
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POSTED BY
CHRIS
ON
WED 24TH OCTOBER
AT
08:01
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THANKS, RICHARD
i'd also like to thank richard for alerting us to the office for national statistics (ONS), wrongly revered around the world for its professionalism, having been hijacked by the international conspiracy to prop up house prices. i'll be writing to my MP about it - though perhaps he's also in on the conspiracy?
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POSTED BY
DAN W
ON
WED 24TH OCTOBER
AT
10:43
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UK ECONOMY : CRASH , BANG ,WALLOP
I live in Gibraltar (effective 0% tax for non-residents , no IHT, CGT etc - yep its nirvana) and like to think in some ways its property market is like a microcosm of the UK property markets. Prices here are VERY high relative to average incomes and yields are good at 6 -7% driven by HNWI's needing a local address ( some of them rent and never put a stick of furniture in the property - dream tenants!).
What you find as Gib prices get high is that the locals ( who have to pay income tax) start living in Spain and commuting across the border so the high prices start reducing the demand - basic economics, I suppose. And this keeps a lid on the prices.
If the UK population starts increasing and prices get ahead of themselves then people will simply move out of the capital to cheaper cities. When thse cheaper cities get more expensive then people will move to new towns on the outskirts ( poor unfortunate souls) and so on and so long as we have enough space ( and we do have a hell of a lot of green bits) then demand and supply will stay in equilibrium - thus housing shortages will not mean house inflation ( and please remember over 10% of property in Liverpool is vacant, for instance, so there ain't any shortage there).
So I would agree with Richard, however, unpopular that might be. Prices in real terms are driven by two things : economic activity(=optimism and higher wages) and interest rates. We can then add in tax for spice which hits at our disposable income.
The problem is that economic activity and interest rates are tightly bound so when one goes wrong often the other does and we have a double whammy ( I think we used to call it stagflation in the 70's). You have to be negative on outlook -we've had a good run, unemployment is about as low as it can get, productivity gains are shrinking, we've caught Germany up and passed them. But Labour can't stop spending - just like the German reunification again, efective tax rate has gone up yet again. The writing is on the wall!
My advice on UK : SELL, SELL, SELL !!!
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POSTED BY
NEIL C
ON
WED 24TH OCTOBER
AT
15:11
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STAGFLATION!
Guys
Let's be a little realistic here.
No one has a crystal ball. There IS a credit crunch the severity of the consequences of which are not entirely clear - although nearly all major observers - the IMF included - see it as shaving, at worst, a percentage point or so off growth. In the US, forecasts are , I believe, around 1.9% growth. Not great! But 1.9% growth of an economy the size of the US is a lot of growth! And it's certainly not a recession!
We are not anywhere near a recession right now, not in the UK, nor in the US - two successive quarters of negative growth.
Now anyone can hunt around to find negative indicators and claim they are being 'realistic' and 'facing facts' and these are definitive proof that the wheels are coming off.
(Why is it, incidentally, that so many pessimists couch everything they say with the claim that they are the realists? )
But to claim stagflation - runaway inflation, out of control unemployment and slowing or negative output - is on the way...well, where is the evidence to support this? Realistic evidence, I mean!
Cheers
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POSTED BY
ROBIN BOWMAN
ON
WED 24TH OCTOBER
AT
15:40
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