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Are UK House Prices about to peak?

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vand
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Are UK House Prices about to peak?

#494482

Postby vand » April 15th, 2022, 11:14 am

Seems to me that the only thing underpinning house prices at the moment is the strong labour market. Well, that, and the obvious political will to keep house prices high.

But looking at things objectively, its difficult to see how prices can go much higher, and the downside risk is considerable now:

- We have a serious squeeze in living standard for the majority of households. All things being equal, this does not lend itself well to rising home prices when people worry about putting food on the table

- Mortgage rates are rising off record lows. 5yr fixies are now 2%, up for 1.3% or so last summer.. and they're surely only going higher over the short term

- House prices are higher


Put the 3 together - higher home prices, higher cost of borrowing, and declining real incomes... it does not lend itself well to continual price growth.

What is going to drive prices higher? Just that everyone wants to own a house? That is how bubbles develop... not say that isn't possible, but when prices bear no resemblance to financial reality then it inevitably all ends in tears.

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Re: Are UK House Prices about to peak?

#494484

Postby Mike4 » April 15th, 2022, 11:38 am

vand wrote:What is going to drive prices higher? Just that everyone wants to own a house? That is how bubbles develop... not say that isn't possible, but when prices bear no resemblance to financial reality then it inevitably all ends in tears.


This has been the case for as long as I have been aware of house prices. Prices are dictated by wage levels combined with bank lending policy (i.e.salary multiples), and not much else in my opinion and experience. Back in the day I applied for a mortgage to buy a cute little three bed victorian terrace for 3 times my salary plus 0.5 my wife's. We got gazzumped by a cash buyer paying £1k more than the £5.5k we had agreed with the seller.

While this was happening we had our interview with the B Soc branch manager who patronisingly explained to me that Victorian terraces were badly built and would only ever go down in value so our loan application was declined. Saw that same house for sale for £1/2m a year or two back. There is always one that grates no matter how much time passes!

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Re: Are UK House Prices about to peak?

#494496

Postby Itsallaguess » April 15th, 2022, 12:56 pm

vand wrote:
What is going to drive prices higher?


Whilst there are a number of growing head-winds, I think it's also been clear for many years now that there are policy-driven tailwinds as well, and I think anyone expecting or even hoping for a particularly drastic house-price crash will do well to remember the number of times Governments have stepped in to provide house-buying policies that then help to prop up the status quo...

We seem to be in an age where, like public-sector wages, a medium to long-term flat-lining of general house prices, with the inevitable inflation-driven fiscal drag, will no doubt be a much-preferred solution to providing a 'softer-landing' to this issue than any type of short, sharp shock that tends to upset the voters a great deal more...

So my vote would be sideways, or at least a much more gentle decline over many years, rather than expecting any large jolt downwards in prices, with Government intervention being seen in terms of introducing buyer-supporting policies if there were any real evidence of a jolt downwards happening...

Cheers,

Itsallaguess

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Re: Are UK House Prices about to peak?

#494502

Postby absolutezero » April 15th, 2022, 1:08 pm

House prices are a function of
-credit availability (linked to job security)
-interest rates

If the first of those gets squeezed and/or the second increases then house prices will fall.

Unless Rishi pops up with freshly printed money to pay your mortgage. Which would not surprise me.

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Re: Are UK House Prices about to peak?

#494506

Postby Lootman » April 15th, 2022, 1:24 pm

absolutezero wrote:House prices are a function of

-credit availability (linked to job security)
-interest rates

If the first of those gets squeezed and/or the second increases then house prices will fall.

Unless Rishi pops up with freshly printed money to pay your mortgage. Which would not surprise me.

Historically between 25% and 35% of home purchases are all cash. In those cases, mortgage rates and job security may not matter.

And in desirable areas that percentage goes up to 50% or more. That is certainly true in the two areas where I am the most familiar with house prices: North London and Devon. My last two housing transactions were all cash and I haven't had a mortgage since 1998.

So it is entirely possible we will see a bifurcated housing market with high interest rates: Upmarket homes in desirable areas continue to rise fueled by domestic and foreign cash buyers, whilst average homes in middle England stagnate.

There has rarely if ever been a time in my lifetime to bet against housing.

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Re: Are UK House Prices about to peak?

#494508

Postby Mike4 » April 15th, 2022, 1:30 pm

absolutezero wrote:House prices are a function of
-credit availability (linked to job security)
-interest rates

If the first of those gets squeezed and/or the second increases then house prices will fall.

Unless Rishi pops up with freshly printed money to pay your mortgage. Which would not surprise me.


Yes and set against that is inflation. House prices can be expected continue to creep up at 7% a year for the next few years, just to keep pace with inflation.

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Re: Are UK House Prices about to peak?

#494509

Postby vand » April 15th, 2022, 1:38 pm

absolutezero wrote:House prices are a function of
-credit availability (linked to job security)
-interest rates

If the first of those gets squeezed and/or the second increases then house prices will fall.

Unless Rishi pops up with freshly printed money to pay your mortgage. Which would not surprise me.


Like with any cash flowing asset, house prices are also determined by their future cashflow discounted to the present. The cashflow of a house is pretty easy to determine - it's the rental amount that it could fetch on the open market.

At some point houses become poor value simply because the prices has gone too high for the future cashflow they can generate. When you can rent a house for 3% of its market value then it's the renter who's getting a good deal, not the landlord. Houses then become unattractive in relation to the expected return in other assets.

From an property investor's point of view you are taking on an awful lot of risk to collect a relatively low future cashflow in the asset class.

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Re: Are UK House Prices about to peak?

#494510

Postby scrumpyjack » April 15th, 2022, 1:40 pm

I have often thought prices were mad only for them to continue to increase a lot.
The supply demand imbalance continues to support prices as does the fact that buying a house is most peoples highest priority.

Economists have forecast 50 of the last 2 house price falls :D

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Re: Are UK House Prices about to peak?

#494511

Postby vand » April 15th, 2022, 1:42 pm

Mike4 wrote:
absolutezero wrote:House prices are a function of
-credit availability (linked to job security)
-interest rates

If the first of those gets squeezed and/or the second increases then house prices will fall.

Unless Rishi pops up with freshly printed money to pay your mortgage. Which would not surprise me.


Yes and set against that is inflation. House prices can be expected continue to creep up at 7% a year for the next few years, just to keep pace with inflation.


No chance that property will do 7% when disposable income is falling and borrowing costs are rising imo. Housing will readjust to more moderate valuations. There is no law that says housing cannot lose either real or nominal values. When unemployment spikes in the next recession it will accelerate a huge downward move.
Last edited by vand on April 15th, 2022, 1:53 pm, edited 1 time in total.

vand
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Re: Are UK House Prices about to peak?

#494515

Postby vand » April 15th, 2022, 1:51 pm

Itsallaguess wrote:
vand wrote:
What is going to drive prices higher?


Whilst there are a number of growing head-winds, I think it's also been clear for many years now that there are policy-driven tailwinds as well, and I think anyone expecting or even hoping for a particularly drastic house-price crash will do well to remember the number of times Governments have stepped in to provide house-buying policies that then help to prop up the status quo...

We seem to be in an age where, like public-sector wages, a medium to long-term flat-lining of general house prices, with the inevitable inflation-driven fiscal drag, will no doubt be a much-preferred solution to providing a 'softer-landing' to this issue than any type of short, sharp shock that tends to upset the voters a great deal more...

So my vote would be sideways, or at least a much more gentle decline over many years, rather than expecting any large jolt downwards in prices, with Government intervention being seen in terms of introducing buyer-supporting policies if there were any real evidence of a jolt downwards happening...

Cheers,

Itsallaguess


Yes, I can see this as a preferred outcome. Stagnant prices in nominal terms so that people don't have to suffer negative equity, while inflation works to gradually erode the debt over a number of years. And yes there will definitely be government sponsored support of the housing market in a downturn.

It then all becomes a question of moral hazard. Bailouts are never without cost. Are underwater homeowners more deserving of support than anyone else? At some point if you abandon the principles of capitalism and socialise the cost of failed ventures then you eventually become a banana republic, and everyone suffers.

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Re: Are UK House Prices about to peak?

#494516

Postby NotSure » April 15th, 2022, 1:51 pm

scrumpyjack wrote:I have often thought prices were mad only for them to continue to increase a lot.
The supply demand imbalance continues to support prices as does the fact that buying a house is most peoples highest priority.

Economists have forecast 50 of the last 2 house price falls :D


Likewise. I've thought they were in a bubble since about 1999!

I think interest rates are the biggest threat. Houses are already a huge multiple of earnings, but when I look at the interest-only part of the payment on my mortgage (even adjusted for HPI since I purchased) it's still only 50-75% of what I'd pay in rent. So if people can afford to rent, they can likely afford to service the interest on a mortgage. This leaves the 'powers that be' scope for propping things up for some way yet - i.e. allow suspension of capital repayment if things get sticky etc. I don't think a large nominal drop is really even 'possible', as in it could collapse the banks. So all I think we can hope for, as stated above, is a decent drop in real prices via flatlining nominal prices and high inflation (assuming wages stay vaguely in touch with CPI/RPI).

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Re: Are UK House Prices about to peak?

#494519

Postby Mike4 » April 15th, 2022, 2:05 pm

NotSure wrote:
scrumpyjack wrote:I have often thought prices were mad only for them to continue to increase a lot.
The supply demand imbalance continues to support prices as does the fact that buying a house is most peoples highest priority.

Economists have forecast 50 of the last 2 house price falls :D


Likewise. I've thought they were in a bubble since about 1999!

I think interest rates are the biggest threat. Houses are already a huge multiple of earnings, but when I look at the interest-only part of the payment on my mortgage (even adjusted for HPI since I purchased) it's still only 50-75% of what I'd pay in rent. So if people can afford to rent, they can likely afford to service the interest on a mortgage. This leaves the 'powers that be' scope for propping things up for some way yet - i.e. allow suspension of capital repayment if things get sticky etc. I don't think a large nominal drop is really even 'possible', as in it could collapse the banks. So all I think we can hope for, as stated above, is a decent drop in real prices via flatlining nominal prices and high inflation (assuming wages stay vaguely in touch with CPI/RPI).



Despite my somewhat bullish view of housing I stopped buying houses in about 2004 when I felt I'd overpaid £84k for a one bed starter home in Reading. Current value about £200k or maybe a bit more.

Rents however continue to creep up which I think also provides a floor to house prices. If we get a crash I think a wall of money would flood in and prevent it getting too bad, given the attractive ROC compared to equities.

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Re: Are UK House Prices about to peak?

#494520

Postby vand » April 15th, 2022, 2:10 pm

Here is the history of BoE base rates:
https://www.bankofengland.co.uk/boeapps ... k-Rate.asp

In the last cycle, interest rates bottomed at 3.5% in 2003, and were steadily increase to 5.75% by the time the market peaked in 2007.
The market continued to go up in the teeth of these rises, but eventually succumbed as prices climbed so high that they no longer made sense at the prevailing borrowing costs - people were buying houses yielding 3-4% (often less) while borrowing costs were 6% or higher...

IMO the market peak was not a gradual thing - there was a tipping point where sentiment turns on a dime. It was a fascinating insight into market psychology. People just realised that it was a bubble and very little of it made sense. I think the same will happen this time. At some point people will just wake up and realise that its not worth chasing the market higher, then housing will "go cold", then Estate Agents will start to starve and tell sellers to cut their asking prices, and it will snowball from there.

Cash buyers are irrelevant - they have always been a factor. They will if anything, eventually help drive the market down, as they will be the one with liquidity who can go and snap up liquidated properties at auction.

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Re: Are UK House Prices about to peak?

#494521

Postby Lootman » April 15th, 2022, 2:19 pm

vand wrote:Like with any cash flowing asset, house prices are also determined by their future cashflow discounted to the present. The cashflow of a house is pretty easy to determine - it's the rental amount that it could fetch on the open market.

People who invest in housing to rent out, rather than those who merely want a place to live, do of course take into account the likely rent. But they also take into account the future price appreciation.

This is similar to investing in shares, where the aim is not just any dividends that share pays out, but also the capital return over time. The latter is more lumpy but over longer periods is more predictable.

I invested in rentals for over 30 years. What was important to me was that the rent should cover the outgoings, and provide a modest return over that. The real money was in price appreciation. The rent buys you the time to wait for that to happen.

And then historically those who provided housing services to others would receive a preferential tax treatment as an incentive. Sadly that has partially been done away with and personally I would no longer factor that into my sums. No CGT on your primary home is still a good deal, but stamp duty has become a pig.

vand wrote:Cash buyers are irrelevant - they have always been a factor. They will if anything, eventually help drive the market down, as they will be the one with liquidity who can go and snap up liquidated properties at auction.

Not when they are buying up to 2/3 of the homes sold in an area, as in the parts of Devon I am familiar with.

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Re: Are UK House Prices about to peak?

#494524

Postby vand » April 15th, 2022, 2:32 pm

Lootman wrote:
vand wrote:Like with any cash flowing asset, house prices are also determined by their future cashflow discounted to the present. The cashflow of a house is pretty easy to determine - it's the rental amount that it could fetch on the open market.

People who invest in housing to rent out, rather than those who merely want a place to live, do of course take into account the likely rent. But they also take into account the future price appreciation.

This is similar to investing in shares, where the aim is not just any dividends that share pays out, but also the capital return over time. The latter is more lumpy but over longer periods is more predictable.

I invested in rentals for over 30 years. What was important to me was that the rent should cover the outgoings, and provide a modest return over that. The real money was in price appreciation. The rent buys you the time to wait for that to happen.

And then historically those who provided housing services to others would receive a preferential tax treatment as an incentive. Sadly that has partially been done away with and personally I would no longer factor that into my sums. No CGT on your primary home is still a good deal, but stamp duty has become a pig.

vand wrote:Cash buyers are irrelevant - they have always been a factor. They will if anything, eventually help drive the market down, as they will be the one with liquidity who can go and snap up liquidated properties at auction.

Not when they are buying up to 2/3 of the homes sold in an area, as in the parts of Devon I am familiar with.


As you say, it's conceptually no different to any other financial asset, though. You buy a stock for its future cashflows with the implicit expectation that those earnings will grow over time, which will be reflected in the capital value also increasing.

With housing there are the additional factors that houses are usually bought as a huge "lump sum" and there is borrowing involved in most instances.

Housing has worked out well for just about everyone involved - especially those who have borrowed to buy - largely due to the huge tailwind provided by the great bond bull market that has driven interest rates from the double digit rates in the 80s down to the sub-1% rates we saw in 2020-21.

As the saying goes, though, don't confuse brains with a bull market. If that trend has reversed and rates are on a long term upward path - and it sure looks like they are - that tailwind turns into a huge headwind for the housing market. I don't say that it isn't possible to still invest successfully in property under these condition, but it will certainly be a lot harder.

The assumption that cash buyers will prop up the market is dead from the waist up imo - you're saying that people with cash who could borrow buyt choose not to, and who will not participate in the market as it goes up to ludicrous levels - will then automatically pile in at the top, just to save the market..? That makes no sense. If they're smart enough to recognise that the market is overpriced they aren't going to buy when borrowers can no longer afford to, just to prop the market it. They're going to be the ones who are buying cheap when there are forced sellers. In any case you might be surprised how quickly the supply of cash buyers can dry up when things go south.

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Re: Are UK House Prices about to peak?

#494526

Postby BullDog » April 15th, 2022, 3:08 pm

Northern England, in my locality buyers are paying significantly above asking price in the teeth of multiple offers for every property that's for sale. Properties are showing sold signs in a week or so of going on sale. There's queues of people for house viewing. There's two properties for sale/sold right next to me so these are current real observations. The property right next door sold last August for £305,000 and is now for sale again and in fact just sold for offers over £400,000. I don't yet know the final price. The other side of me, after queues of viewers is sold, I don't yet know how much for. I expect competitive sealed bids given the queues of viewers.

So, the market is red hot, overheating and this is surely the very peak of the market. A sustained period of house price stagnation has to be next. It always has been when it's been like this before.

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Re: Are UK House Prices about to peak?

#494529

Postby Mike4 » April 15th, 2022, 3:20 pm

BullDog wrote:So, the market is red hot, overheating and this is surely the very peak of the market. A sustained period of house price stagnation has to be next. It always has been when it's been like this before.


I agree, stagnation could be is next but not a decline in prices. People just take their houses off the market rather than accept a price cut, most often.

We are Easter weekend, the start of massive housing market activity until the holiday season starts, then it dies on its feet until the kids go back to skool, then a brief surge of activity until thoughts turn to Xmas and it all dies down into doldrum territory again. SO for now, I predict a bit more rampant inflation.

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Re: Are UK House Prices about to peak?

#494530

Postby Mike4 » April 15th, 2022, 3:24 pm

Oh and I forgot to say, its the same in the world of narrowboats and camper vans.

I've just advertised one of my boats and sold it to the first viewer. Must have been too cheap dammit! The chap offered the full price subject to survey but I said no, I'll see if I can find someone who will buy without a survey. He just agreed and said ok no survey, here's 10% deposit while I clear all my personal belongings out.

Also someone I know bought a camper van for £33k last year, just sold it for £50k. Plenty of money still about.


Edit for speeling

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Re: Are UK House Prices about to peak?

#494532

Postby BullDog » April 15th, 2022, 3:38 pm

Mike4 wrote:
BullDog wrote:So, the market is red hot, overheating and this is surely the very peak of the market. A sustained period of house price stagnation has to be next. It always has been when it's been like this before.


I agree, stagnation could be is next but not a decline in prices. People just take their houses off the market rather than accept a price cut, most often.

We are Easter weekend, the start of massive housing market activity until the holiday season starts, then it dies on its feet until the kids go back to skool, then a brief surge of activity until thoughts turn to Xmas and it all dies down into doldrum territory again. SO for now, I predict a bit more rampant inflation.

Yes, there's no doubt currently there's a frenzy of seasonal house buying here. The last time I can remember anything quite like this was 1987 when every conversation seemed to involve a discussion about how much a person's house is worth that week. It was followed by a significant period of slowly declining or static at best house prices. I think we are likely going to see something akin to that from Q3 this year. The current buying frenzy is unsustainable.

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Re: Are UK House Prices about to peak?

#494533

Postby Mike4 » April 15th, 2022, 3:49 pm

BullDog wrote:
Mike4 wrote:
BullDog wrote:So, the market is red hot, overheating and this is surely the very peak of the market. A sustained period of house price stagnation has to be next. It always has been when it's been like this before.


I agree, stagnation could be is next but not a decline in prices. People just take their houses off the market rather than accept a price cut, most often.

We are Easter weekend, the start of massive housing market activity until the holiday season starts, then it dies on its feet until the kids go back to skool, then a brief surge of activity until thoughts turn to Xmas and it all dies down into doldrum territory again. SO for now, I predict a bit more rampant inflation.

Yes, there's no doubt currently there's a frenzy of seasonal house buying here. The last time I can remember anything quite like this was 1987 when every conversation seemed to involve a discussion about how much a person's house is worth that week. It was followed by a significant period of slowly declining or static at best house prices. I think we are likely going to see something akin to that from Q3 this year. The current buying frenzy is unsustainable.


Well of course it's unsustainable. All bull markets are unsustainable. Last time I saw it like this was 1997 to about 2007. Seemed like it would never end but the fin crash fixed that, predictably. I know that nice Mr Brown told everybody "No-one could have predicted what happened", but plenty of posters on TMF were predicting exactly what happened. The one thing they consistently got wrong was the "when" part. The crash callers started off about 1997 and they were a decade too early. As illustrated back then its easy to predict the future, predicting exactly when the future will happen is the hard part.


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