I have particular memories of 1990 because I bought a house at the beginning, and sold one at the end of the collapse in property prices – fortunately for me someone else was picking up the difference in prices, the house that sold went for £125,000 – down from an asking price of £175,000 in 9 months. That collapse was brought about by the end of tax relief on mortgage interest, and was preceded by a bubble of frantic activity all summer as prices went through the roof. Then one day in autumn someone turned the tap off, and the market died literally overnight. As a house hunter I was in and out of Estate Agents several times a week, one day it was “please wait over there I will be with you in a second”, the next it was an office like a morgue.
What sets this market apart is the unprecedented support that it has had both from within the industry, and from government. Property Press has been calling a recovery since January, and finally the market has followed what it has been repeatedly told it ought to do. London has benefited in particular as the collapse in the pound has made anything British very cheap for foreigners, and so in the face of a worldwide collapse in property prices, Real Estate money has come to the literal pound shop of the global High Street – London.
Many in Property in their economic ignorance openly yearn for a Conservative Government – they fail to appreciate that “Quantitative Easing” of £175,000,000,000 and interest rates of 0.5% are unprecedented intervention, which has prevented a 70% collapse in property prices – who would believe that the best friend Bankers and Estate Agents ever had would be a Socialist Government?
One of my first blogs written almost a year ago makes very interesting reading a year on!
Margaret Thatcher famously observed “There is no way in which one can buck the market”, and 20 years later this still applies. The Government has declared it’s intent to wind back Quantitative Easing as soon as it can, everyone else’s Real Estate market is recovering ahead of ours ………….
Here is the graph – YOU fill in the dots for Q4 2009, & 2010 ………
UK Property Prices
So what do YOU think that the graph is going to do?
Look at the graph and tell me when you think that we are going to get back to where we started – I reckon another 4 years, but you tell me what you see?
Next read the article – notice …. if there are signs of recovery in the Property Market the Government intends to take advantage of it and reverse the Quantitative Easing. The stimulus that is prompting the recovery will be removed as soon as there are signs of a recovery – it’s there to prevent freefall, not to inflate prices.
By definition a market cannot recover until it shakes out the last seller who has been holding off waiting for a price recovery. Until this happens at each recovery the pent up “demand” of sellers appears and offloads stifling any recovery. Currently in the Property Market that picture is crystal clear – a very small number of buyers are taking whatever comes to market, which is very little. There is no structural demand so ultimately prices must trend downwards.
The recovery will start when there is a buyer in the market who can’t find what they want to buy, and has to put their price up and force someone who wasn’t going to sell to make an offer. I wasn’t expecting that until Easter, but am beginning to wonder whether I was being too optimistic. Because the market has been talked up and supported over the summer it hasn’t been able to exercise its natural decline, so that dip is waiting to happen. Probably the end of the Stamp Duty holiday in January will be the trigger for the next fall, hopefully just another 10% and over by Easter so that the market can return to normal conditions.
Technical Analysis and the Head and Shoulders
UK Property Prices
Anyone who has used technical analysis to trade equities will know that volumes are as important as price. The current recovery means nothing because it is not accompanied by a significant volume. TA would suggest that the current increase in prices is the second Shoulder in a classic Head and Shoulders formation – made famous by the 1929 Stockmarket Crash.
Head and Shoulders
Whilst I agree with that analysis, even I wouldn’t sign up for the classic TA prediction that we are on the edge of a 70% drop in house prices.
TA is widely used on Options, Commodities, Equities and Gilts (every financial investment there is except property), but there is an argument that with other investments the buyer and the seller have little they can do with the investment other than buy, sell or hold, and when they hold they get little value. The argument runs that with a house, the pricing for the market is dominated by the 70% who are owner occupants, and most of these owners are buying and selling for personal reasons, they are unsophisticated as property investors, buy/sell for status reasons ‘Oh, honey I really like the place. We have to buy it.’.
The market of Equities, which saw the birth of TA, is every much as imperfect as the housing market. Only 1% of Equities are actively traded. Most Equities are held under the mattress, or sold through intermediary instruments – Investment Trusts, Unit Trusts, Pension Funds, Employee incentive schemes. The equivalent of ‘Oh, honey I really like the place. We have to buy it.’ comes from the major industry of newsletters and tips which is tell readers that they have to buy on the basis of a myriad of reasons such as “Penny Shares”, High Tech, Venture Stocks right through to – yes TA! A market is a market to TA, whatever the rational behind the trades.
In a way all of that is irrelevant – remember that it is impossible to make money trading a perfect market. You can only make a profit if the market is wrong in some way, whether you are a fan of Benjamin Graham or Charles Dow your profit comes from recognising the Extraordinary Popular Delusions and the Madness of Crowds first described in 1841.
I think that it’s an entirely reasonable to take a position that TA doesn’t work, I’m quite tempted to myself as I have proved to my own satisfaction that I am not sufficiently talented in TA to stake money on my analysis. However I also know that there are hundreds, if not thousands of analysts who earn their daily crust by its application. What I find most interesting, and the fundamental reason for this commentary, is that most people don’t believe that house prices can fall far, they believe that property has some intrinsic value which, like a sky hook, will hold prices at within 10% of their current values. So I would ask you these 4 questions:
The 4 Questions
1. Do you think it possible that rents will return to the level that they have been at for the other 90 years of this century?
It is only in the last 10 years that residential property yields came anywhere close to mortgage rates. The business model of making a yield from Property is a fairly recent, and maybe transient phenomenon. Historically a property investment was about Capital appreciation and an inflation hedge. The reason BTL portfolios swept all before them was that the idea that you might be able to cover a 90% mortgage payment from the rent was a novel idea, probably never seen before, and as such a number of investors made a spectacular fortune from exploiting that new idea.
2. Do you think it possible that Banks may adopt a more conservative approach to lending?
Is the Pope Catholic? We are experiencing it. Historically lenders required a salary cover for a loan of 2.5 times salary, but in the last decade this has crept upward until we stand at 5 times salary. A return to the norm could nearly halve house prices.
3. What do you think holders of highly geared BTL portfolios will do when property prices fall, and interest rates rise?
Some such as the Wilsons are already restructuring in order to be able to withstand such events. Under the circumstances described those who haven’t anticipated the possibility will be forced into fire sales into a falling market.
4. Is the 1988 Housing Act perfect?
The law on renting changes quite regularly 1968, 1977, 1980, 1988, 1994, 2004 …… the biggies being 1977 & 1988. Is it time for another big change? The government has been considering removing the Landlords’ right to possession – basically a return to all the pre-1988 laws. Shelter has been lobbying for this change, and historically what Shelter asks for Shelter gets. Prior to the 1988 act and BTL phenomenon tenanted houses were valued at 50% of those with vacant possession.
The Million Dollar Question
Now TA never claims or tries to understand the fundamentals behind market moves, in fact most practitioners believe that considering fundamentals impairs the TA. TA predicts what the market is doing, and where the market is going. The reason for asking those 4 questions is to illustrate that a dramatic crash in property prices is fundamentally a possibility. Too many people have an almost religious belief that the price of property cannot fall. Answering those 4 questions will explain what is possible – but of course the million dollar question is whether the BTL phenomenon of the last decade really is a structural change in the economics of this country, or just a 10 year aberration? I guess we will found out fairly soon!
This article was inspired by a discussion on the highly regarded Property Social Media Site Property Tribes
Even though the Government has practically given the Banks Billions of Tax Payers money in order to stave off the property collapse, the Banks have not passed the cheap money on. Rather predictably they have trousered the lolly, upped the bonuses and tipped the Chancellor with a “thank you”. City analysts suspect that the Chancellor may now get the Bank of England to reverse the interest rate paid to banks on their reserves with the central bank in an effort to stop institutions hoarding the extra money, and introduce a charge for holding cash with the Bank.
What next? Mortgage holders being paid to borrow money? Landlords paying tenants to look after their flats? Alice in Wonderland for Prime Minister?
The economic downturn is now the biggest challenge facing Mayor Boris Johnson as he sets his first budget for the capital. The Mayor is grappling with this challenge, while attempting to re-orientate City Hall to his new priorities. The Mayor’s Economic Recovery Action Plan sets out a detailed £3bn package of measures to get London back on track and through the economic downturn, including helping businesses, helping Londoners, and investing in London’s infrastructure and skills base to support long-term growth.
The report by the Assembly’s Budget and Performance Committee says Transport for London (TfL) is facing the risk of a significant shortfall in fare income. TfL is revising its 2009/10 budget to reduce operational expenditure in anticipation of this shortfall, which will have an impact on the services it provides. The organisation is already experiencing lower than planned growth in passenger journeys – the increase in passenger journeys in 2008/09 is less than half what TfL had planned for. The Mayor said:
“The severity of the economic downturn and its sharp impact on Londoners has required urgent practical action. I want to do all I can to ease the burden at this time, and have asked TfL to introduce a number of targeted fares reductions and concessions to help those on low incomes who will feel the impact most strongly.
“I want to help the thousands of Londoners who, during these tough times, will find themselves looking for work, by making it easier for them to get around the city when travelling to interviews and accessing other amenities that will help them find jobs .”
The Mayor has already introduced a number of targeted fares reductions and concessions, including reduced off-peak tube fares, half price bus fares for Londoners on income support, free travel for war veterans and the 24 hour Freedom Pass. Mayor of London, Boris Johnson, today announced that over the next year London’s half-price bus and tram travel scheme will be extended to include thousands of unemployed Londoners in receipt of Job Seeker’s Allowance (JSA) or the new Employment and Support Allowance (ESA). The move, which is part of the Mayor’s Economic recovery Action Plan, is designed to help people back to work by making it easier to travel to interviews, and access libraries, job centres, and other amenities. It means that from 1 April eligible Londoners in receipt of the allowances will be able to access the same half priced travel concession that those on Income Support currently benefit from. The extension means that around a further 150,000 Londoners should benefit from the scheme over the next 12 months. Those eligible for the discount represent some of the poorest people in London not already eligible for travel concessions, and the Mayor is particularly concerned to help this group through the current economic downturn. The discount will also help those who benefited from the previous Income Support discount scheme who have now been made ineligible by the changes to the benefits system that the Government has recently introduced. The extension will mean an investment of £3m for the year in terms of lost revenue.
The economic crisis will mean that emergency services may have to cope with changing patterns of demand. For example, the MPA told the Committee that it is expecting increases in crimes such as theft and burglary. Falling income from invested cash and plummeting property prices have also had an impact on the budgets of both the Metropolitan Police Authority (MPA) and London Fire and Emergency Planning Authority (LFEPA), which have had to revise their property strategies. In addition, the London Development Agency (LDA), as the agency for economic development and regeneration, has had to revise its plans in order to help London deal with the economic downturn.
Harold Wilson once mused that for the man who had just lost his job, the rate of unemployment was 100%. This means that for those of us still employed the rate of unemployment is 0%. That hurdle overtaken we can look forward to the recession with optimism:
Our mortgage, overdraft, & credit card bill is cheaper thanks to lower interest rates.
House prices are tumbling, making it the ideal time to buy, move up market into that nicer area we’ve always longed to live in (think Pimlico).
The crash in the value of the £ has made London stupendous value for money on the international market. Standby for a flood of tourists this summer, but it doesn’t stop at tourism – for any international business London just became cheap as well as best.
As The City & Banking just became the pariahs of the Business World we will see our brightest & best young people go into useful careers (think Teaching, Engineering …. )
At a time of major investment in The Olympics, Tube upgrade, the East London line, DLR extensions, and Crossrail, we will get better value for money from the expenditure.
Yes – it’s safe to say that 2009 will be a boom year for residents of Central London.
