It seems that the Main Stream Media (financial writers, editors and general news reporters) have at last awoken to the complete farcical situation in the UK’s property market, that has been made much worse by the Conservative Government’s blatant cynical electioneering ploy to push house prices higher into the General election in 18 months time.
Now the article (see link below) written in the Telegraph by Jeff Randall (I could have picked any one of dozens of MSM articles), talks of the UK House price ratio against Salary of 4.6 : 1 and the rising debt leverage, however that completely mitigates the true extent of this upcoming financial disaster which is the Greater London Area where all the real house price inflation has actually occurred.
As of June 2013 (Land Registry of England) Greater London average house price was £ 475,940
Detached £ 825,069
Semi-Detached £ 496,468
Terraced £ 542,238
Flat £ 404,973
However Rightmove put the average in October 2013 of £ 544,232, after another huge rise.
As of 25th November the average London Salary was £ 35,218
That is a ratio of 15.45 : 1 Greater London Average Property against London Average Salary!!!
But again that discounts the true picture. The actual real hard evidence of my friends and colleagues (including myself) on a number of various London boroughs that we purchased in the early mid 1990’s, house prices were trading on a multiple average of 3.5 : 1 and these same properties are now physically trading at between 27 : 1 up to 32 : 1.
Now obviously I understand that the ratio of 3.5 : 1 was a massive over-reaction to the property market collapse of the late 80’s into 1993 (extreme affordability brought about by the UK raising Interest Rates from 8.5% Dec’87 to 15% Oct’89), but that’s what markets do – they overreact / overshoot.
But a move from 3.5 : 1 to 31 : 1 , you cannot see a disastrous ending of this particular cycle???
Ideal Time to buy a house is at the top of the interest rate cycle, interest rates move lower, payments fall and house prices become much more affordable and hence prices rise in a higher ratio against income.
Now Interest Rates are at a new 320 year low. A 33 Year Super Cycle in Debt / Lower Interest rates has resulted in extreme Real Negative Interest Rates, heavily supported by aggressive Central Bank Intervention.
What does the future hold ?
1. Interest Rates will move higher
2. Housing Debt costs will rise dramatically
3. House prices will fall hard.
Now I hear all the same excuses from every property investor (I have heard this many times) “the house prices are being driven by foreign money and hence this supports higher property prices” - This reminds of the Tech Boom Nasdaq bubble into the year 2000 when everyone was telling me “Revenues are not important in analysing stock valuations, it’s the amount of clicks (visits to sites) that are important”, well that ended well !!!
In all super bull markets, they end the same way - the last 10% of time period involved in a Super bull market ends in a parabolic rally along with excuses of why its different this time !!
Now I actually believe this madness will continue into mid 2015, but if you are investing or leveraging up debt loads to purchase a house, then I would seriously think twice - as the end result is only going to end one way.
Best of Luck…..Mitch.
When the best business story of the week involves a Methodist preacher, a holier-than-thou bank and Labour Party funding, laced with allegations of narcotics abuse, rent boys and dubious expenses claims, it is, I accept, no easy task diverting readers’ attention to less exotic matters. This, however, is my goal today. For, while the Rev Paul Flowers has been busy incinerating the Co-operative movement’s reputation, Britain’s property market has caught fire and the blaze is running out of control.
Strange though it may seem, these events have a common theme: inappropriate adult material. In the case of Flowers, it was racy images left on his computer at Bradford council. For the rest of us, the offending content, known to some as “property porn”, can be ogled on the government’s Help to Buy (HTB) website. The HTB scheme is designed, it seems, almost entirely to please those with a prurient interest in house-price bubbles: builders, estate agents and local solicitors. It is nothing more than populist, short-term electioneering posing as a cure for Britain’s chronic, long-term housing headache.
If affordability is the problem, a policy that makes houses even more expensive cannot be the solution — but that is what’s happening. Buyers are able to tap state-funded assistance up to a value of £600,000. This is emergency aid for the huddled masses of Kensington and Chelsea. When property prices are rising and real wages (inflation-adjusted) are falling, as they are, only the suspension of disbelief will bridge an ever-widening gap. HTB may well help to buy votes, but it will end in tears.
The housing challenge facing government is not complicated: too many people, too few homes. When you have more buyers than sellers, guess what? The price goes up and up until the elastic snaps. The trouble is, few ministers will address part one of the problem – population growth – because it necessitates being honest about immigration and the impact it is having not just on numbers in the country today but on tomorrow’s birth rates.
Nothing terrifies Westminster MPs more than the suggestion of being “racist”. This is craven, head-in the-sand politics. Only last week, the European Union issued a report showing that the United Kingdom has the EU’s fastest-growing population. According to Eurostat, official numbers living in the UK (not including illegals) grew by 392,000 in 2012, 38 per cent of which was accounted for by net migration. The Office for National Statistics (ONS) puts the figures slightly higher at 420,000 and 39 per cent respectively. For context, Nottingham’s population is about 300,000.
Part two of the problem is the rate at which we are constructing homes. A government-backed report in 2004 concluded that Britain needed 250,000 new houses a year to meet growing demand. Even before the credit crunch, completions fell way short of that and, despite a recent surge in new buyers with cash to burn, only 28,500 private houses were started in the three months to September. In other words, the situation is deteriorating, as the number of people who want homes in the UK far outstrips supply.
The upshot is that the average house now costs £173,678 (Nationwide figures), yet the average weekly wage, including bonuses, is £474, or £24,648 a year (ONS). Even allowing for the fact that newcomers to the housing market tend to join the ladder at the cheaper end, the ratio of first-time buyer house prices to average incomes is still 4.6:1.
HTB is encouraging people to overstretch their finances at the bottom of the interest-rate cycle – the very worst time to do so. With money priced at a 320-year low, the only way is up. When that happens, monthly outgoings will rise, house prices will fall and those on the edge of solvency will go bankrupt. After the credit crunch, household debt in Britain fell from 170 per cent of annual income to 140 per cent. That trend is now reversing, as government “initiatives” lure punters into a debt trap. The Bank of England’s financial stability report points out that 20 per cent of home loans have been made to households that are left with less than £50 a week after housing costs and essential spending. Even a 1 per cent rate rise could create a new cohort of distressed borrowers.
The Bank, the Office for Budget Responsibility and the ONS have all been behind the curve in assessing the rapid recovery in the British economy.
Job creation has been much stronger than official figures suggest. The Bank’s 7 per cent unemployment “target”, the point at which it expects to start increasing rates, could be here sooner than Mark Carney, the Governor, envisages. When that happens, those who have gambled on the housing market remaining a one-way bet on cheap money and rising property prices will be stuck in a difficult place: under water but with no liquid assets.
HTB is fiscal chicanery that prompts irrational behaviour by making the unaffordable appear within reach. In the short run, it rewards the Treasury with a bonanza of stamp duty payments. But how much of those receipts will be lost when the taxpayer is called upon to bail out delinquent mortgages?
Tackling Britain’s housing problem requires two bold moves: much tighter restrictions on the number of people arriving in the UK and an ambitious building programme to provide decent accommodation for existing citizens.
Handing out funny money to bid up prices is simply weasel economics.
Finally As Pento stated on KWN……
Pento: “It’s actually comical that after 5-years of telling the market that QE is all about pushing interest rates lower, particularly long-term interest rates, now they (the Fed) are doing backflips and trying to say that ending QE isn’t going to cause interest rates to rise. Let me just go back into a speech that Bernanke gave last year in Jackson Hole….
“This is a quote from Ben Bernanke, ‘The Federal Reserve’s long and large scale purchases have significantly lowered long-term Treasury yields.’ Did you get that? The Federal Reserve’s large scale purchases, their QE program, by the way they are on QE4 right now since they announced this program in March of 2009, they have ‘significantly,’ not my words, his words, ‘significantly lowered long-term Treasury yields.’
And now they are trying to propagandize, lie, obfuscate, and confuse the market into telling you you are so stupid not to remember what they’ve been telling you for 5-years: That their manipulation of interest rates and counterfeiting and printing money hasn’t worked. But it has. It has lowered interest rates on the long-end of the yield curve.
And now they are threatening to stop doing it because they (feel) can’t do it any longer. They can’t stand the fact that they have counterfeited $4 trillion worth of credit and money. It hurts them (their credibility). They really feel uncomfortable doing it, but they can’t stop. They’re trapped.
They are trying to get out of QE, but the exit door is blocked by soaring Treasury yields, (what will be) plummeting equity prices, another real estate crisis, skyrocketing US sovereign debt service payments, massive currency disruptions, and a deflationary depression. That’s what lies on the other side of year, after year, after year of money printing, credit creation, counterfeiting, and interest rate manipulation.
There is no exit. There is no easy exit, and that’s why they are delaying the tapering, Eric. Do you ever wonder why they didn’t do it in September, when the market was ready for it? It’s because the 10-Year Note went from 1.5% to (roughly) 3% in just a few weeks.
If the Fed goes ahead and tapers, interest rates go to 4% on the 10-Year (Note), and all of the things I just mentioned occur, and we’re back into a deflationary depression. I believe that would cause them to institute a permanent state of QE. That’s where we’re headed, Eric. That’s what 2014 has in store for you.”