Thursday, January 17, 2008

The flying castle

I remember last year I was talking with an IT contractor, who was in his spare time investing in some fancy property projects, about the property market. I was arguing that the price will go down and we were heading for a big "correction". He was making the point that it will continue to raise because of the lack of property, immigration etc... I answered by a "but rent are not sky rocketing"...He was convinced and did not want to miss the property cash lottery - apparently all the ticket were winners -.

At the time beginning of 2007, rare were those who were saying that a crash was on its way. 3 month later a acquaintance of mine, a pure bull who was advising me to invest in the property market, told me that she was now thinking properties were not a good investment anymore. The mood started to change ...

It was less than 1 year ago, now everybody agree that it's not going to raise, and few still think that it's going to at worst stagnate...

How can people come to think that a 140% increase since 200 and something was normal? How did people in NI think that 50% increase was sustainable?

Vested Interest, easy lending, fraud. All of that I guess. But now Banks can't lend easy anymore, people are repossessed, and for the lest 3 months prices are going down, even in London - how improbable, remember in December I was in the pub and somebody was saying that it could not fall in London ... -.

What can we say about the future? not much. The doom monger are already singing the end of the world, and the optimist still believe that a house crash is unlikely.

The truth is probably in the middle. I'm convince that house price will go down, my guts tell me a 80% chance of a 40 to 60% fall in real price.
I see 3 reasons for that:
- classic valuation tell us that property are overvalued between least 20% and 40% according to different financial sources. a property is an investment that give you a return the rent. The same way you can compute the price of action base on its dividend, you can compute the fundamental price of flat with its rent.
- the bubble directed a lot of money on the property market. More than what was needed creating an oversupply of flat. Shocking no ? everybody talk about shortage, but there is no shortage otherwise rent would have follow the same path.
- a lot of the east European immigrants are working on the commercial or residential property market. As the property market slowdown, and the commercial one is already crashing, there is less demand for labour, most of them will cash in and go back to their mother country. reducing the demand of flats.

So we have a raising offer and a declining demand, and largely over valued prices, that sounds like a great cocktail for a massive correction.

Will that put the capitalistic system on its knees? I don't think so, it's not the first crisis. If government don't play stupid it should be painful for some but ok.

PS: there is a lot of risk on inflation, and that's kind of scary

a 50% fall cancels a 100% increase
2% fall month to month for 12 months is 21% fall year to year
1% fall month to month for 48 months is 39% fall on the 4 years
I said real price, meaning price adjusting for inflation, I price stagnate that means real price fall at the pace of inflation. At 2% a year - the target -, that's already 10 % - 9.6 to be more precise - on 5 years.


Vonric said...

I think you mean "it's going to at BEST stagnate" and not as you wrote: "it's going to at worst stagnate".

I disagree on the "big" fall you are predicting (not only because I am a landlord, my property increased already +100%, so I would still win). I do not see the market raising but I think it will be stagnante, maybe for 1-2 years. London is still very attractive for rich people...

French Fry said...

except taht if you look here

and there in the pdf

For London

Nov 2007 167.5
Oct 2007 171.1
Jul 2007 171.1
Jun 2007 165.4

so it's already falling, quite noisy data month to month to, but look at the trend ...
put inflation into that, and you have already a fall.

other source

by the way a fall of 50% cancel a fall of 100%

Rich people does not multiply, and represent a very small portion of the market.

What i see, is banks tightening the credit, buy to let crashing. And we have not got to the self certified mortgage yet.

In the USA everybody disagree with the big fall, actually house prices could not go down ...

in 2006 prices were acknowledge to be overvalued by a conservative 20%. in history have you hever seen a soft landing?

French Fry said...


I mean that some people think at wost it's gonna stagnate. e.g.
House prices across the nation will defy the doomsayers this year and settle to an average growth of 3pc, according to latest research from CB Richard Ellis.