Monday, 31 March 2014

Could the House Price bubble burst before the election?

A week is a long time in politics. A week can also be a long time in the financial markets - as can a day. Just looked at the smashed share prices of the insurance companies now being investigated by the FCA - a load down 20% or more in the blink of an eye.

When sentiment turns, it can go very bad. My own investment in GKP is down to 90p today from heady heights of 450p just a couple of years ago. it's a big change and the facts have changed so along with that so have the prices.

Currently in London we have a massive house price bubble. Huge population growth, limited housing development and competition from the World's wealthy for a piece of 'London Gold' is driving prices up at an incredible rate. Great times to be a property developer or agent, less good for those wanting to buy a house or even rent at a decent price.

As well as the human factors, the Government has weighed in by restricting permitting for new developments and pushing Help to Buy. In addition there is the Funding for Lending Scheme and record low interest rates for a 6th year running. Liquidity is everywhere. Anyone can borrow and borrow a fortune - encouraged by the Government and the Banks that they own.

It is a witches' brew, the higher prices go, the bigger the crash will be. Last time many eminent commentators were warning about a crash in 2003/4 that did not happen until 2007. Then the global nature of the crash saved London as it became a safe haven for capital flight.

From a UK politics view at the moment this is benefiting the Government. The Government has engineered a nice boom which is helping, construction, banks and moving the liquidity created by QE into the real economy. After such a terrible financial crisis, this is in many ways a good thing.

Except that we are moving liquidity into a sector which is already far beyond its natural level. If it were a share, the London market is ASOS. ASOS is a frankly brilliant company which is hugely successful, but its share price went far beyond its value or that of its management to keep pace with. As such it has suffered big drops recently. At some point too another paradigm comes into play. There is an old market saying that when every market 'Bear' has become a 'Bull' then the market changes because there is no one left to sell - shares cannot go higher.

We are already seeing this with super top end London property, where prices and volumes are way down for over a year now. Most of the World's super rich who want a London pad already have one. I would not want to be one of these investors in Mayfair super-developments where they think average sale prices are going to be north of £20 million at £6,000 per square foot.

This effect will slowly trickle down the market in due course. The huge demand pressure is from the bottom of the market in the main so prices will always be cushioned and London property is unlikely to crash like a busted share. However, down it will come and the feel-good factor will wane and the effect on the economy will be real.

The top of the market is also here, maybe it will last for another 2 years, maybe 3. There is a chance though that sentiment turns more quickly and with it will go the Government's re-election strategy. So even though it is a terrible policy, don't expect to see the end of Help to Buy anytime soon.

21 comments:

hovis said...

Cant remember where I saw it - it may even have been a comment here. It was suggested that the majority of Help to Buy was outside the capital and given the lower prices outside of London was actuall a helpful policy for once. I don't have the figures so don't know if it's true, it is however an interesting juxtapostion to the position ( I natutrally hold) that HtB is the worst form of tinkering.

Blue Eyes said...

Help To Buy doesn't really affect London because even with 95% mortgages normal people can't borrow enough to buy sensible homes in London.

The real issue is that London has huge amounts of premium flats under development, I read somewhere that 150 blocks of flats are under construction in inner London. Supply may at some point catch up with overseas demand.

However there is a genuine housing shortage in London so if lots of overseas investors suddebly decide they have enough capital tied up in London, perhaps they might decide to sell or rent out their new homes to residents. Which would make sense. The suggestion at the moment is that lots of the new flats are left empty because in lots of cultures second hand flats are less valuable than brand new.

I take a Blairite view: I don't predict the future; I never have and I never will.

Demetrius said...

As someone who called the last crash, I am getting a little twitchy but the money flows are hard to work out. I do not like all the sale boards out at the moment. It might depend on which prick in the government bursts the bubble.

Ed Millibrain said...

The obvious solution to this is a price freeze. Houses that do not sell at the frozen price will be nationalised. This will stabilise the market and go forward not backward.

MyNewName said...

When the housing bubble in the UK bursts it will take down the whole state.
This is why we must have bubble (96-01) after bubble (03-07) after bubble (09-14?)
At each stage the bubble collapsed and was propped up by some govt intervention. Browns rate cut in 05 being most gratuitous and unnecessary example of an economy/state committing suicide in modern history.
People it seems have become inured to insanely high house prices in the UK, indeed they are so browbeaten by the corporate borrowing machine that they have come to seem this state of affairs as desireable.
It is shameful to see UK citizens become serfs to foreign landlords all the more because its happening on their own land.

Electro-Kevin said...

Small terraces bought for 80k in 1996 in Willesden are now selling for 800k.

This was a rough area when I was last there. A look at the crime stats for Feb this year reveals:

4 'most serious' violent assaults against the person. 43 ordinary ones. 46 anti social acts. 6 robberies.

Areas do change and get better. But 800k ?

Gazumping, closed bidding, open days. All this sounds like bubble activity even if it isn't.

Other stats show that the number of London buyers taking out mortgages over 4.5x salaries is now in the high teens - meaning that not all of it is cash 'safe haven' money; a lot of it is risky debt.

Bad news headlines such as we've had in the last week could precipitate a sit-back-and-wait attitude and I'm not sure the govt can control that.

HTB was a terrible risk. Not because it can cause a crash but because Labour can blame the Tories when the inevitable happens.

At what point will people pile back in though ? It is quite clear we have a population crisis and there is huge pent up demand for home ownership.

Electro-Kevin said...

Should read:

Other stats show that the *percentage* of London buyers taking out mortgages over 4.5x salaries is now in the high teens - meaning that not all of it is cash 'safe haven' money; a lot of it is risky debt.

Nick Drew said...

Osborne always knew 5 years was easily long enough to engineer a 'feelgood' economy if he couldn't deliver an 'actually good' one (Brown nearly managed it in 2 years after '08) - it's similar to you can always borrow while your are AAA

annuities, property - what other feelgood schemes for Tory voters does he have up his sleeve for the next 12 months?

One thing's for sure: Clegg ain't gonna stand in his way

I suppose the Osborne genius-strategy is notionally something like: feelgood election in 2015, narrow Tory majority, fix the electoral boundaries, then fix the economy properly

(but there will always be a reason to delay the proper fix ...)

Blue Eyes said...

I would like to add that my lovely flat seems fairly immune to the bubble. Investment buyers could get a very respectable yield were they so minded. I think the lenders and cash buyers are quite selective.

Classic Victorian terracee houses and pokey newbuilds seem to command a premium over well built postwar flats.

andrew said...


Over the next 1-2 years,
If there is to be a fall in prices, it will be in London mainly - as they saw the largest rises.

Beyond that, when mortgage interest rates start to rise (*not* the BOE base rate as this is not really linked to anything a personal or small business can borrow at) We sill see how it pans out across the country.

CityUnslicker said...

so basically we all agree - an accident is waiting to happen!

Electro-Kevin said...

CU - It has to happen. Average earnings cannot be dislocated from average house prices as they are. The rent-to-value in many parts is out of kilter too.

MyReusableName said...

@Electro-Kevin, I've heard this many times before, most notably in 2004-05 when prices had been rising for nearly a decade after the last slump in the early 1990s. Then, with >20% increases in the previous year Brown cut the interest rate when prices looked like tailing off.

The real problem here (and in the pensions post) is the establishments hidebound approach to a century old measure of growth called GDP.
Houses traded often and for increasing amounts cause GDP to rocket, never mind that this is done with borrowed money, and that is enough for the govt and (seemingly) the electorate.
This is why the country is bolloxed and caught in a self-fellating loop of higher house prices and higher debt. Imagine the state of our planning - and how backward we'd be - if we still used Yards, Pints, Ounces and suchlike... err...no hang on.....

Anonymous said...

"CU - It has to happen. Average earnings cannot be dislocated from average house prices as they are"

They can be as long as there are enough wealthy cash buyers, and as long as people can afford to pay the required rents.

Which they can (just). Until they retire with a State pension. Then it'll get "interesting".

Electro-Kevin said...

Thanks Anon and MyReusableName.

I don't want to be right.

Of cash buyers.

The price of any given commodity isn't determined by a central 'stable' core of unmortgaged owners but by the peripheral economic activity where sales are happening.

Relative to demand there aren't many properties for sale at the moment.

15 to 20% of distressed home owners in London is enough to turn the market if they start handing back the keys - as might happen with interest rates shocks.

There may be a return of buyers afterwards but when and at what price ? More realistic ones perhaps ?

Electro-Kevin said...

I've done a rough estimation on Willesden (why not ?)

A terrace priced at £750,000 commands a rent of around £2,300 pcm.

It looks over priced... because it is !

The factor betwixt a sensibly priced house and its annual rentable value is 16 maximum - thereafter the balance shifts to it being cheap to rent and uneconomic to hold on a mortgage.

This particular house is...

27.47

The real money in the economy can't afford to pay for this house on a purchase basis. Only speculators with cash or those backed with funny-money loans.

I also forgot to mention prices being affected by a stampede of sellers trying to cash in at these ridiculous multiples - perhaps they're holding out for the million pound mark to be hit.

Sebastian Weetabix said...

E-K: you're right, it is waaaaay too expensive for the working stiff. But so what! That isn't where the money is coming from. Rich Asians are buying houses and flats in London mortgage free because it's a safe haven and a safe asset. That has a huge knock-on effect.

Just imagine; lets assume you're a 60 year old Singaporean Chinese. In your lifetime you have been a colonial subject, a Malay citizen, and now you're a citizen of a prosperous micro state. You're surrounded by millions of Muslims who really don't like you or your kind. You've lived through race riots where hundreds have been killed. You've lived through the Indonesian emergency in the 60s. Your father and mother recall Japanese invasion, complete collapse of the social order and the Sook-Ching massacres that probably saw the Japanese kill as many as 80,000 Singaporean Chinese for the crime of being Chinese. Happily you're now a successful man with several million in the bank. Why not provide against an uncertain future by having a bolt hole in a city which has an unrivalled record of stability and safety? Of course you also need investments in case of the need to run.

One Singaporean guy of my acquaintance owns his own house in London that he lives in 2 weeks a year. He also bought 35 other properties without a mortgage so he always has a bit of income going into his local bank accounts. He doesn't care how rents compare to mortgages. He doesn't even care if interest rates go up. But in the meantime he's hoovered up 36 properties local people can't buy. Multiply him by a few hundred for each of the rising Asian economic powers and you have a huge pressure on housing, but it isn't really a bubble, is it? That's the joy of an open city with free money flow. It's good for the banksters, lawyers and accountants (let's call them "Tories" shall we?) but probably not good for the rest of us.

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Jeremy Olm said...

The interest rates and price bubbles can just blow up and pop at any one time. It is really difficult to know the pattern unless we are experts in the field and have been studying the market regularly. Pertaining to matters like these, I often leave them to the credible hands of an estate agent who have been in the industry for many years so they will definitely know what to do next.

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