How far will house prices fall [volume 4]

[Mr Whippy]

walm said:

Mr Whippy said:

Such a stark gap leaves you wondering who is right and who is wrong.

Not at all.

This isn't rocket science.
And annuity providers absolutely can use BTL (or rather "property" as it is more commonly known).
(Any corporation investing in property for investment purposes is by definition BTL.)

I don't know how much they do use property, probably not that much.

Annuities are essentially linked to gilt rates.
They are very very low risk investments, backed by large finance houses who (as above) will use a myriad of different investment strategies to guarantee the yield they achieve is over the rate they give their customers (the delta being their profit).

On the other hand a single unit of BTL should be considered VERY risky.
You will have voids, local issues, large one-off maintenance issues, the volatility of the rental market etc...

The reason the yields are higher on a BTL up-north than on an annuity is because... GUESS WHAT!! Risk-reward!

There is absolutely no mystery.

OK, and my point is that oop'north properties are cheap and have yields because they are risky.

And to risk all on an oop'north property with your pension pot isn't sensible imo.


As part of a spread of investments yes. But 30yrs or so in retirement is a looonnnggg time. Lots WILL change in that time and I wouldn't want to be tied into something that might become increasingly hard or impossible to get out of!

Dave

[NomduJour]

Mr Whippy said:

OK, and my point is that oop'north properties are cheap and have yields because they are risky

No - a strong market with capital appreciation means yield compression (people will pay more for the same return, trade-off being capital growth). Not the same thing as risk vs yield per se.

[Mr Whippy]

NomduJour said:

Mr Whippy said:

OK, and my point is that oop'north properties are cheap and have yields because they are risky

No - a strong market with capital appreciation means yield compression (people will pay more for the same return, trade-off being capital growth). Not the same thing as risk vs yield per se.

Capital appreciation potential.

Unless we have crystal balls that are telling us the North will be the new London by 2030

I'm happy to be proven wrong of course, but isn't it this kinda of convoluted man maths speculation that got us into this property bubble mess in the first place back in 2007/2008?

Just because it could go up doesn't mean it will.

Just because it appears like good value doesn't mean it is.

Too much stuff oop'north went up in value purely because it could... there is a lot of stuff around that doesn't deserve to be anywhere near the price it's at imho.

Dave

[NomduJour]

Mr Whippy said:

Capital appreciation potential

No - actual, real, it's happened-and-it's-still-happening capital appreciation leading to yield compression in London vs the North.

Mr Whippy said:

I'm happy to be proven wrong of course, but isn't it this kinda of convoluted man maths speculation that got us into this property bubble mess in the first place back in 2007/2008?

I'm not telling you what will happen but what has and is happening. Something will inevitably cause prices to fall at some point but I'm not a soothsayer.

Mr Whippy said:

Too much stuff oop'north went up in value purely because it could...

Just because it could? No, people were willing and able to pay more money for it - demand combined with availability of credit. If that changes, sold prices fall (and overpriced houses just sit on the market).

[Derek Chevalier]

NomduJour said:

Mr Whippy said:

OK, and my point is that oop'north properties are cheap and have yields because they are risky

No - a strong market with capital appreciation means yield compression (people will pay more for the same return, trade-off being capital growth). Not the same thing as risk vs yield per se.

More details in on Wkikpedia

http://en.wikipedia.org/wiki/Greater_fool_theory

"The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants.[1] A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price.[2][3] Or one may rationally have the expectation that the item can be resold to a "greater fool" later.[4"

[Derek Chevalier]

LucreLout said:

Derek Chevalier said:

That is the problem - how many people are old enough to remember that the property market is cyclical? Yet more moral hazard introduced by the Government....

It no longer matters. Prices have risen for the best part of 25 years. There's no going back now, at least, not to a position that will bail out those who went short on housing.

Can the market retreat? Yes, somewhat. Will it? Not by much as there's no votes in that. Will it drop to 2003 levels? Not nominally, no.

Didn't they say the same thing in Japan?

[turbobloke]

Derek Chevalier said:

LucreLout said:

Derek Chevalier said:

That is the problem - how many people are old enough to remember that the property market is cyclical? Yet more moral hazard introduced by the Government....

It no longer matters. Prices have risen for the best part of 25 years. There's no going back now, at least, not to a position that will bail out those who went short on housing.

Can the market retreat? Yes, somewhat. Will it? Not by much as there's no votes in that. Will it drop to 2003 levels? Not nominally, no.

Didn't they say the same thing in Japan?

The lack of an accurate parallel with Japan was covered in depth in one of the earlier house-prices-not-crashing threads.

[walm]

Derek Chevalier said:

NomduJour said:

Mr Whippy said:

OK, and my point is that oop'north properties are cheap and have yields because they are risky

No - a strong market with capital appreciation means yield compression (people will pay more for the same return, trade-off being capital growth). Not the same thing as risk vs yield per se.

More details in on Wkikpedia

http://en.wikipedia.org/wiki/Greater_fool_theory

I don't think this is fair.
I think it is absolutely rational to believe in LONG TERM inflation.
(Particularly with a government printing money!)
As a result it makes sense that hard assets will also rise in price.

So if I were doing a full financial analysis of a property investment I would absolutely build in some level of inflation which would enhance my returns above and beyond the simple net rental yield.

People do this everyday. A 4% gross yield on property absolutely does not justify the risks, transaction and other costs.
You would be better off with that new risk-free 4% bond from the government or whatever it is.

So completely rational people are building in some capital appreciation to their numbers.
And with a little leverage, it doesn't have to be huge to add 1-2ppt to the yield.

Of course you can disagree and say - look at the oil price, look at wages, look at interest rates and say we will have zero to negative inflation which is most likely close to true for a couple of years.
However, it's not irrational to disagree with that view.

[Derek Chevalier]

turbobloke said:

Derek Chevalier said:

LucreLout said:

Derek Chevalier said:

That is the problem - how many people are old enough to remember that the property market is cyclical? Yet more moral hazard introduced by the Government....

It no longer matters. Prices have risen for the best part of 25 years. There's no going back now, at least, not to a position that will bail out those who went short on housing.

Can the market retreat? Yes, somewhat. Will it? Not by much as there's no votes in that. Will it drop to 2003 levels? Not nominally, no.

Didn't they say the same thing in Japan?

The lack of an accurate parallel with Japan was covered in depth in one of the earlier house-prices-not-crashing threads.

Ah, must've missed that. Any idea what the differences were?

[NomduJour]

Derek Chevalier said:

More details in on Wkikpedia

The greater fool is the one with zero comprehension skills.

My point is only that yields are lower in London than the North because of yield compression. Not sure how anyone could interpret that as taking a position on the market.

[walm]

NomduJour said:

My point is only that yields are lower in London than the North because of yield compression. Not sure how anyone could interpret that as taking a position on the market.

What???
That's exactly what yield compression is.
You think you will get asset price appreciation (inflation) so you accept a lower rental yield.

How is that NOT taking a position on the market?

[Derek Chevalier]

NomduJour said:

Derek Chevalier said:

More details in on Wkikpedia

The greater fool is the one with zero comprehension skills.

My point is only that yields are lower in London than the North because of yield compression. Not sure how anyone could interpret that as taking a position on the market.

And my point was that many in London are not covering their costs and are relying on someone paying them more at some point in the future than they paid to escape above water.

[walm]

Derek Chevalier said:

And my point was that many in London are not covering their costs and are relying on someone paying them more at some point in the future than they paid to escape above water.

Which, unless they bought in the last year or so, will be seeing them making out like bandits!

[98elise]

Derek Chevalier said:

turbobloke said:

Derek Chevalier said:

LucreLout said:

Derek Chevalier said:

That is the problem - how many people are old enough to remember that the property market is cyclical? Yet more moral hazard introduced by the Government....

It no longer matters. Prices have risen for the best part of 25 years. There's no going back now, at least, not to a position that will bail out those who went short on housing.

Can the market retreat? Yes, somewhat. Will it? Not by much as there's no votes in that. Will it drop to 2003 levels? Not nominally, no.

Didn't they say the same thing in Japan?

The lack of an accurate parallel with Japan was covered in depth in one of the earlier house-prices-not-crashing threads.

Ah, must've missed that. Any idea what the differences were?

Entirely different concept to the UK market. Their homes are built cheap and sold to be demolished and rebuilt. The idea of a property increasing in value seems alien to them.

This is according to my Japanese SIL. Might be different in big cities.

[NomduJour]

walm said:

How is that NOT taking a position on the market?

Obviously those buying and accepting a lower yield are taking a position, I meant I wasn't necessarily advocating it.

Derek Chevalier said:

And my point was that many in London are not covering their costs and are relying on someone paying them more at some point in the future than they paid to escape above water.

Same as anywhere, but I certainly wouldn't say most. Yields are generally lower in London but there are still people making money (just as there are people who aren't).

[jonah35]

Most people do not have a mortgage.

Oil prices down,inflation down, rates lower for longer.

[walm]

NomduJour said:

Obviously those buying and accepting a lower yield are taking a position, I meant I wasn't necessarily advocating it.

Doh!
Sorry.

[9mm]

Interest rates will go up
When they do, rents will not increase to the same extent
Some landlords will find themselves paying for their tenants' accommodation
Some landlords will have to bail
More property will come onto the market
(Affordable) housebuilding will increase
Valuations will decrease

I think the only real question is the extent to which each of the above will happen. My only interest would be in whether I can rent my properties as I would have no mortgages on them. Capital appreciation, which seems to be the get out of jail card for a lot of people, is of no interest to me whatsoever, as I have no interest in >2035. Quoted yields seem like a bit of a joke to me, as they never never appear to take into account things like repairs, maintenance charges, periods where the property is unoccupied, tenancy disputes, unpaid rent, etc.

All of this just tells me that BTL is a possible investment but it's a very long way from a universal and guaranteed solution. Not sure I see any kind of catastrophic crash ahead but I can foresee a period of unpleasant stagnation.

[fishballs]

9mm said:

Interest rates will go up
When they do, rents will not increase to the same extent
Some landlords will find themselves paying for their tenants' accommodation
Some landlords will have to bail
More property will come onto the market
(Affordable) housebuilding will increase
Valuations will decrease

I think the only real question is the extent to which each of the above will happen. My only interest would be in whether I can rent my properties as I would have no mortgages on them. Capital appreciation, which seems to be the get out of jail card for a lot of people, is of no interest to me whatsoever, as I have no interest in >2035. Quoted yields seem like a bit of a joke to me, as they never never appear to take into account things like repairs, maintenance charges, periods where the property is unoccupied, tenancy disputes, unpaid rent, etc.

All of this just tells me that BTL is a possible investment but it's a very long way from a universal and guaranteed solution. Not sure I see any kind of catastrophic crash ahead but I can foresee a period of unpleasant stagnation.

Most of what you have written is pure speculation. The fact is we are in a very benign interest rate environment with low inflation. You won't see 10% interest rates again in your life time would be my best guess. Affordable housing will always lag the demand for teh simple reason there is more money in not so affordable housing. BTL are simply part of a well balanced portfolio. By the way some posters are carrying on they are preparing for WW3 and alien invasion.

[JagLover]

fishballs said:

Most of what you have written is pure speculation. The fact is we are in a very benign interest rate environment with low inflation. You won't see 10% interest rates again in your life time would be my best guess. Affordable housing will always lag the demand for teh simple reason there is more money in not so affordable housing. BTL are simply part of a well balanced portfolio. By the way some posters are carrying on they are preparing for WW3 and alien invasion.

I would agree we wont see 10% interest rates for the foreseeable future.

But 4% would have been regarded as low until the financial crises. At some point we will enter into a more "normal" financial environment where savers can earn a return on their money again.