May 28th 2010
Where do we go from here?
You love asking me these questions. Funnily enough, I love answering
them.
Actually, the answer is very easy. However, the real question hasn't
been asked properly. What do you want out of this? What currency
interests you? Do you want to rush for capital gain? Do you want an
income for life? All these questions will give you different answers as
to what you do next. So I can only answer the question in a general
sense.
Let's first make it clear what you need to be looking at. There is a
mass of information out there, and most of it is utterly irrelevant.
You have to be focused on the things which count. Let's look at the
house price situation coolly and calmly. What elements go to make up
the housing market?
You need a house, you need a purchaser, you need a seller. The
purchaser needs to have enough money to buy, and enough money to
service any loan. The seller needs to be happy with the amount offered
by the buyer. The banks need to be in the mood to lend. Take away any
one of these elements and the buy chain collapses. Everything else, and
I mean everything, is irrelevant.
Let's present things backwards. No house means no deal. No purchaser
means no deal. No seller means no deal. Not enough money to buy means
prices go down, or there is no deal. Not enough money to service the
loan leads to repossession, and the property goes back into the system
but at a lower price. Uncooperative banks lead to less money in the
system and therefore a drop in prices.
Forget immigration, forget smaller families, forget Arab billionnaires.
None of that counts for anything. After all (the last category
excepted) they all need money to service any deal.
All of this leads us to look at the important information. What is bank
lending like? How much are wages going up? If they dont go up house
prices cant go up either, because it is wages that pay the mortgage.
What are interest rates doing, or likely to do in the future? If they
rise then the cost of loans goes up, so the price of houses has to come
down or wages have to go up.
How do we know where we are now? Simple, look at the right chart info.
Look at a chart of bank lending. It's way down, and with European and
American banks in turmoil, things are not likely to change any time
soon.
Here is the Bank of England's latest chart on lending:
Excuse me, but it looks as
though the banks are just not lending.
Look at wage inflation. It is low at around 1%. That means there is no
room for the average family to splash out on any kind of purchase. That
means house prices wont be going up any time soon.
Where are we as regards the
affordability index? Still high. In Bournemouth the level is 8. Nowhere
is the level below the long term average, which is about 3.0. In other
words, rather a lot of areas are at twice the average. Excuse me, but
if it's that high in an economic crisis who in their right mind expects
it to go up?
There are several other
points which one needs to be aware of. There are a few pointers as to
how these situations play out. Let's look at some.
There have been several house price crashes in the last fifty years.
The main ones were in the early seventies, the early eighties, the
early nineties, and the current one. In short there seems to be a crash
roughly once a decade. They usually coincide with recessions. Why?
Because that is when people are strapped for cash. There are still the
same number of people wanting to buy houses, but the banks are not keen
to lend during recessions, and the money available for mortgages is
reduced during hard times. It's all terribly simple really.
Secondly, house prices are the last item to recover from any crash. The
economy starts to turn round, and people begin to get higher wage
rises, more people have jobs, and overtime increases, and people start
to feel confident about the future. Then they splash out on a bigger
house, and bid the price up a bit. That kick-starts the market, and
gradually, once more people see the corner has been turned, everyone
piles in, and prices rise.
As I always say: The window of opportunity does not close at the
beginning of a market rebound, it closes at the end. No windows are
closing now. They are just opening. They will probably be open for the
next decade at least. However, very few people will be taking the
opportunities presented because it will be some time before the market
moves ahead, and there are no capital gains to be made for the
foreseeable future despite what your sweet talking salesman may say.
Rental returns are another matter. They do very often stack up quite
nicely.
Third; look at how long it took for the last property recession to work
it's way to a conclusion. Five years is pretty normal. Very few booms
last more than seven years. And most recessions, or slow-downs last a
similar length, and sometimes longer. The crash at the end of the
eighties lasted over eight years. Of course, it depends on the area you
choose. Different parts of the country register different results.
Nationwide claim the post-war crash lasted six years. The seventies
crash lasted 4 years, the eighties disaster lasted 7 years, although if
you look at the Halifax house price chart you will see that it took 10
years for prices to get back to previous highs. How many people think
we will be out of this one in under five years? Anyone who puts their
hand up needs, in my opinion, a reality check.
Fourth; house prices surge as
interest rates go down. After all, it is the cost of the house that
counts, not its price. If interest rates are high, then so are your
payments. Remember another golden rule:
A 2% rise in interest rates equals a 30% rise in the
cost of your mortgage.
That of course, also leads to the next rule.
Dont buy houses when interest rates are rising or
are likely to rise.
For those who haven't noticed, the current rates in the west are the
lowest in recorded history. There is only one way for them to move -
up! That is one very good reason not to over-stretch yourself now. That
also means that there is very little room for prices to move upwards.
There is a snag to all this. The current indexes claim house prices are
going up.
Gosh, so they are. They are up 3 or 4%. But they are up from a rather
precipitous drop. They are way below the peak. In any case, that is
market noise. They will fall back again for the reasons I give above.
Just to push the point home, look at history and learn from it.
Something most people dont seem able to do. The last three big crashes
have lasted on average five and a half years. Prices fall on average
about 30% during big crashes. At the end of a crash the price/income
ratio is 2.8. It is now more than 5 across most of the country. I guess
that would be acceptable if we lived in boom times. How many of you
think we are in a boom right now?
Where are we now?
The banks aren't lending, so the market is stalled. People are poorer
and unemployment has risen so there are less people out there with
money to push up prices. Many people are sitting tight and waiting to
sell in better times. We haven't come out of the recession so the
property market hasn't started its rebound yet.
The "experts", those daft people who pretend to be able to do the job
of ladies with fancy neckerchiefs and gold fish bowls, who generally
work in white tents on the playing fields in summer, say we are in for
a small rise in prices this year, and a healthy 9% rise next year. Ha
ha, what a laugh!
I shall not be purchasing houses again until we hit bottom, and stay
there for a year or two. I shall also wait for interest rates to rise,
and then, when they begin to edge down again, that is when I will buy.
Meanwhile I am going on a long, very long holiday.
Real estate investing is for the long term. Dont be so impatient. Just
wait, and the wheel will come round again. When it does most of you
will find you cant buy in as you were too impatient. I shall be waiting
to buy your mistakes. Alternatively, you can actually believe me this
time. I got it right in the seventies. I got it right in the eighties.
I got it right in the nineties, and you know that I gave you the sell
signal at the correct time at the end of the last boom on the Unique
Property site. I guarantee I shall be right when I tell you to start
buying again.
John
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