Sunday, August 17, 2008

Why UK House Prices Are Going Much Lower

Sometimes anecdotes are the most powerful evidence in turning the obvious, or the mere statistically-likely into the deterministic. Such was the case with a post entitled pfwooooor!!, my faithful recounting of an encounter with a dyed-in-the-wool wide-boy southwest London property speculator. Friends are no longer incredulous about my increasingly requited forecasts for both UK Property and Cable. Those friends who live abroad, and will eventually acquire something back in the UK are now waiting for an evolution in prices closer to the -30% (in asking prices) and -30% (in sterling) that I think will coincidentally benefit a would-be purchaser from a dollar-earners perspective.

Last night I was broadsided by another such anecdote. Some friends are selling their ordinary 1br Westminster mansion block flat purchased less than a decade ago for approx one-third of the current asking price (GBP 475000) which sounds decidedly more benign than the 350% price-appreciation this represents. "So what's the current yield?" I asked casually, (and slightly impolitely, feeling almost as if I was asking one's salary). "Pardon me?" was the reply. I tried again: "You know, the rental yield, the annual rent less costs, taxes and fees divided by the capital value...." A quizzical and slightly confused look crossed their face indicating that they'd NOT REALLY THOUGHT ABOUT IT, at length, or recently, anyways. "I - I - don't really know.....it's not leveraged". Now I knew a-priori this was NOT a lifestyle asset. It had been rented since purchase and was a financial spec property (and as good as it gets in hindsight from any perspective - particularly a USD one. But that was then, and this is now. Helping them out, I suggested "...so income was never a factor since it was so small compared to capital appreciation, right?" "Yes!! Yes!! That's it". Hmmm. I see. They did their sums, acknowledging that it wasn't much and virtually apologized for the paltry income. I translated it into a meaningful number (without looking shocked): "That's about two-and-one-half percent". They added that the "market was slow" and that their agent actually thought they'd need to drop their asking price GBP 25,000 or approx 5%.

Unequivocally, I offered them my advice: "Preserve your gains - Hit any bids". "Don't dally". "Forward sell your sterling". "Value convergence is in motion and will NOT be reversed. Neither incomes nor inflation are likely to rise any where near what is required to prevent price destruction. Finance will remain scarce. The heady days of housing asset price appreciation untethered from yield and sanity will be absent for some time to come...." Look out below!

8 comments:

Anonymous said...

Oh Cassandra, the great seer of value merchandise, do tell us what yield we should look for as bargains. Us momentum types are blind as bats when it comes to "values".

-pi

Chris (i-cjw.com) said...

Value has been achieved when you can buy a property, rent it out at fair market rates, and make money in cash-accounting terms from day one.

Deduct from the rent the interest and principal payments, forfeited interest on the downpayment, any property management fees, advertising expenses, property taxes, expenses for cleaning, repairs and maintenance, insurance, any utilities/licenses paid, and make an allowance for vacancies.

If the number left is still positive, then you may have value. Anything else is not. I'm not in London so I don't know where it lies in this scheme.

"Cassandra" said...

Chris, creator of the most unimaginably beautiful photographs, particularly the early-morning sun-shadows created from the walk on the ridgeline somewhere high above treeline in the Japanese mountains, the answer is that in London, it is oh-so-negative in nominal terms. It is far worse in real terms.. Oh course if you're an oligarch, kleptocrat, mafiosi, or trustafarian, such details matter not in the least. I think however, when the tree is shaken, there will prove far fewer of these types than were thought otherwise.

Anonymous said...

Which lenders are most exposed to the mortgages in UK housing?

Did the UK go the whole hog with exotics like Neg-Am or did they stick with just vanilla types?

GC said...

Anon.
UK mortgages are on the person and not just the house. No Neg Ams. Too much 100% LTV in last few years and teasers rates .

But key issue is that decent lending rates require 30 to 40% down.

Anonymous said...

Looking to pick up a little something in Blighty soon - please, please, please let this exchange rate/house price prognostication come true.

"Cassandra" said...

I mostly agree with GC. How could a prudent risk manager sit and comfortably watch loans originated upon wafer-thin equity AFTER such an ascent in prices, when yields were abysmally low, and AFTER props collateral values' relentless departure from median incomes?? American comparisons (yields , prop vals relative to mediam household income etc.) look tame by comparison. I'd thought some of the chaps (e.g. Lloyds) were more sober, by every UK bank and building society witnessed extraordinary asset growth from 04 through - 07 unrequited by equity capital. In other words, they all (almost certainly) have mondo exposures to falling prices that will add to existing requirements to raise more equity. Unless the asset growth was in things like LBO loans, credit-card receivables, commercial real estate loans, in which case they all (almost certainly) will have mondo exposures to falling asset prices that will add to existing requirements to raise more equity...

Anonymous said...

Their best bet to meet the market price and scamper away with the winnings is to approach buyers with a need to put their money where there mouth is such as the present and ex-Chancellor, doves on the MPC, RMBS salespeople, senior execs at SWFs, heads of Westminter council finance, assorted foreign Voldemorts, or those ex-govt with access to "private" mortgage finance.