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

UPDATE:
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.