Singing Pig

Lets be honest, it is isn’t it?

Especially for a lot of full time property investors that started their businesses in the last two or three years. Many will be forced back into their previous careers, some inevitably will go bust.

With tightening credit markets the heady days of cash-backs at completion are largely over.

Sure you might be able to get the odd deal through, but with underwriters continually moving the goal posts how sustainable is it?

Not to mention that with lower valuations, loan to value ratios, higher interest rates and rental cover requirements, you need to be buying at a deep discount to have any chance of a cash back at completion at all.

If you’re not able to get cash backs and you’ve recently become a full time investor, where does your income come from? (Apart from HMO rentals.)

And don’t even think about selling! In my opinion Buy To Sell (BTS) isn’t an option right now, as there are simply very, very few buyers around. In fact I’d say this is the best buyers market for a generation. To sell a property right now you’ve either got to be lucky or selling at a big discount yourself.

Put it this way, have you been in an estate agent’s recently? The ones I’ve been in, well, to be frank I’ve seen more life in a morgue! Make no mistake a lot of companies associated with property will go to the wall before the end of the year, estate agents, mortgage brokers, removal companies, surveyors etc. Not to mention all those people who gave up jobs and spent their hard earned cash to train as HIP providers. How much business are they doing right now?

Apparently the Council of Mortgage Lenders and Royal Institution of Chartered Surveyors have recently announced they expect property sales to be down by 35% and 40% respectively, this year. Unless things pick up soon, which I very much doubt, I think 65%-75% is more realistic.

How long is this credit crunch likely to last? Nobody knows, could be 6 months, 12, 18. One thing that is a good bet, with falling house prices and the massive losses many financial institutions have suffered, lending criteria won’t be as lax has it has been for the foreseeable future.

How far are property prices likely to fall? We’ll in the last property cycle prices fell by about 35% in real terms (allowing for inflation) and 12% in nominal terms. In addition it took over 12 years for property prices to exceed their previous peak reached in 1989.

This fall did however coincide with the recession of the early 1990’s. At present the economy is holding up fairly well, and as long as it continues to do so we may escape the same level of depreciation. Personally, I think the fate of house prices in the UK will to a large extent be dependent upon the price of oil. If the price of oil continues to appreciate, then inflationary pressures will limit the Bank of England’s ability to lower interest rates, as they have a mandatory inflation target of 2%.

By now you’re probably thinking I’m a right doom and gloom merchant! I have after all laboured the point to the downside. But no, I think there are some fantastic deals to be done right now, provided you can secure the deal no-money-down and most importantly it produces good positive cashflow. (Why else would you want to acquire a depreciating asset right now unless it puts money in your pocket every month?)

As a full time landlord with properties throughout South Yorkshire and Lincolnshire, I have a vested interest in property prices going up like most people here! However, I do think it’s all too easy to see just what we want to see. As the saying goes;

“We see things not as they are, but as we are.”

When you think about it, it sure does make sense. As an analogy, on 9^th November 2001 two planes flew into the World Trade Centre. Some saw it as a barbaric, cowardly act that claimed the lives of thousands of innocent people. Others saw it as an act of martyrdom and a just response to aggressive US foreign policy. The fact is two planes flew into the World Trade Centre, yet people saw it differently - based on their belief system.

I guess most of us are here because we believe property investment is a good way of making money. And because of that it’s easy to ignore or discount any news or opinion that is counter to those beliefs.

Anyhow, I thought I’d share some of my thoughts and experiences with you. How are you finding it, what’s been your experiences of late, and how do you see things going forward?

Andrew

I agree with much of what you say, but I am a little bit disturbed that you are posting a commerical advertisement here.

More disturbing still is your implication that on morally objective grounds equal weight should be given to the opinions of those who believe that murderers of innocent people are martyrs as to the opinions of those who see them as murderers. I’m sorry, but you are talking nonsense.

Moving on though, re UK real estate prices: BTL has been the driver of house price inflation in the UK since 2002 when the average first-time buyer was priced out of the market. From 1945 to 2002, average house prices have oscillated with the business and credit cycles between 5 (maximum "love" for housing) and 3 times average earnings (maximum "hate" for housing) - I would post a chart, but I can't see a way to do it. As leveraged speculation (i.e. BTL) on housing took up the slack from the FTB, it drove house prices to 7.5 times average earnings in 2007. As this is the biggest (actually in my view, the only) real estate bubble in living memory, the market has to go to at least 3 times earnings before stabilising or rising for the long term. This means an earnings-adjusted fall of 60%.

So, what does this mean for nominal house prices? That, naturally, is a question of how much earnings rise in the time between 2007 and whenever the bottom of the market is. We can make some good assumptions about how much earnings will rise on a per-annum basis though: The BoE has a single remit - keep inflation at about 2%. We know, and they have admitted, that they have been behind the curve somewhat with the inflation coming through this year. Aside from that, however, we can reasonably expect that they will keep inflation at about 2% thereafter. So, let’s take an average of 2.5% for the coming years. Earnings tend to rise at a rate above consumer price inflation (real earnings growth) – varying between 1% in recession and 2% in times of high economic growth. As this is certainly a time of growth slowly into recession, we should use the lower end of that scale, meaning that we should assume an earnings growth per annum of about 3.5%

OK, putting our number together, we find that depending on how fast it takes the market to bottom from mid 2007, gives us different nominal results for house prices relative to mid 2007:

3 years, 2010: -54%

5 years, 2012: -51%

7 years, 2014: -47%

My feeling is that, given the enormous size of the bubble and the recession which is to come, we will get the bulk of the falls within 3 years while taking another 3 years to slowly and truly bottom out. This would mean nominal falls of about 52%. Still, in nominal terms, that’s more than 3 times worse than the last bear market, and when you consider that leverage is multiples of what it was, it is going to feel even worse than that.

One good thing will come out of it though: The notion that “house prices always go up in the long term”, usually spouted by those too lazy or stupid to work out what really drives house prices, will need redefining so much that it will be rendered meaningless and finally dismissed as the absurdity it is.

I don't disagree that things are going to be a bit grim for the next 3 years in particular, but your price to earnings ratios are a bit too simplistic a measure of affordability as they fail to take interest rates into account.

Extradry Martinis:

I agree with much of what you say, but I am a little bit disturbed that you are posting a commerical advertisement here.

More disturbing still is your implication that on morally objective grounds equal weight should be given to the opinions of those who believe that murderers of innocent people are martyrs as to the opinions of those who see them as murderers. I’m sorry, but you are talking nonsense.

Moving on though, re UK real estate prices: BTL has been the driver of house price inflation in the UK since 2002 when the average first-time buyer was priced out of the market. From 1945 to 2002, average house prices have oscillated with the business and credit cycles between 5 (maximum "love" for housing) and 3 times average earnings (maximum "hate" for housing) - I would post a chart, but I can't see a way to do it. As leveraged speculation (i.e. BTL) on housing took up the slack from the FTB, it drove house prices to 7.5 times average earnings in 2007. As this is the biggest (actually in my view, the only) real estate bubble in living memory, the market has to go to at least 3 times earnings before stabilising or rising for the long term. This means an earnings-adjusted fall of 60%.

So, what does this mean for nominal house prices? That, naturally, is a question of how much earnings rise in the time between 2007 and whenever the bottom of the market is. We can make some good assumptions about how much earnings will rise on a per-annum basis though: The BoE has a single remit - keep inflation at about 2%. We know, and they have admitted, that they have been behind the curve somewhat with the inflation coming through this year. Aside from that, however, we can reasonably expect that they will keep inflation at about 2% thereafter. So, let’s take an average of 2.5% for the coming years. Earnings tend to rise at a rate above consumer price inflation (real earnings growth) – varying between 1% in recession and 2% in times of high economic growth. As this is certainly a time of growth slowly into recession, we should use the lower end of that scale, meaning that we should assume an earnings growth per annum of about 3.5%

OK, putting our number together, we find that depending on how fast it takes the market to bottom from mid 2007, gives us different nominal results for house prices relative to mid 2007:

3 years, 2010: -54%

5 years, 2012: -51%

7 years, 2014: -47%

My feeling is that, given the enormous size of the bubble and the recession which is to come, we will get the bulk of the falls within 3 years while taking another 3 years to slowly and truly bottom out. This would mean nominal falls of about 52%. Still, in nominal terms, that’s more than 3 times worse than the last bear market, and when you consider that leverage is multiples of what it was, it is going to feel even worse than that.

One good thing will come out of it though: The notion that “house prices always go up in the long term”, usually spouted by those too lazy or stupid to work out what really drives house prices, will need redefining so much that it will be rendered meaningless and finally dismissed as the absurdity it is.

 

And the effect of regional demand  ( esp London and S/E ), mortgage eligibility ( or should I say the ineligibility) criteria forcing people to rent, will have what part exactly in the above scenario? 

Well, another 0.5% off prices this month, BTL investor with 20 properties has lost 10% this month off his average price of 1 home... Thats gotta hurt!

As for supply/demand of rental, show me one recession in which rents have gone up.  Pretty difficult once Unemployment starts to rise ( I predict in the next 3 months we will see unemplyment start to rise) I predict UK recession by this christmas... 

mbga9pgf3:

Well, another 0.5% off prices this month, BTL investor with 20 properties has lost 10% this month off his average price of 1 home... Thats gotta hurt!

I agree with you, Sam, that if the investor is desperate to sell or remortgage right now - then he's truly buggered, it would be his own fault for making poor assumptions, and he would jolly well have deserved it.

However, the truly professional BTL investors will be looking to the long term and won't care what prices are doing in the short-medium term.

Challenging times!  Makes it more fun!  ;-)

Alan

rents in several areas of the country are going up -  the local housing allowance legislation has led to some very interesting anomalies in certain "collective" districts   -    a few districts have been lumped together into one larger area, the poorer districts are now seeing an uprise in rents in line with the previously higher rental districts

and as others have said - if mortgages are not available with as much ease as before -  then FTBs will have to rent  - and thats always good for our business.  

clottie, that doesnt answer my original point; that of course rents are going to go up in the short term, but once the recession hits, people lose their jobs and money gets even tighter, rents will DROP! They always do in a recession, its what recession is about.  Show me figures in any recession where rents went up - they dont, because people simply cannot afford to.  BTLers also need to realise the big charactersitic of the recent housing boom is an oversupply of rental properties at significant discount; lots of city centre flats that arent making any money WILL= rental falls when people are forced to downsize.  Its simple market economics, looking past what is going on now and instead looking on at what will happen in 12 months!

Fewer FTBs is also going to give you a capital loss in excess of 30%, so I dont see how you are spinning this as "Good news!"