Why our experts are still pessimistic about property – MoneyWeek

MilesShipside:YousaythisisthecaseincitiesthroughouttheUK?

NB:Particularlyinalotofthenortherncities。

WhenreturnsinLondoncooledoffafewyearsago,peoplewentnorthandexpectedthehighrentalreturnstheysawthereinitiallytobesustainable,buttheyhaven’tbeen。

There’snowanover-supplyofverysimilarapartments。

Developershavebeenbuildingfoinvestorsandinvestmentclubs,ratherthanforpeoplewhoarebuyingpropertytoactuallylivein。

Thatputsusinunchartedterritory。

LorenzoCodogno:You’retalkingmainlyaboutprivateinvestors?

NB:Mostly。

Theworsthitaregoingtobepeoplewho’veboughtuncompletedflatsviaproperty-promotioncompaniesatseminarsandnowcan’tsellthem。

They’regoingtobeprovidinglotsofmiserablecasestudiestothepapersprettysoon。

Peopleseemtothinkthattheydon’thavetoworrybecausethefactthatyouwillbeabletobuyapropertyviaaself-investedpersonalpension(Sipp)willkeepdemandup。

Butthesamedodgypeoplewhohavesoldthesebuy-to-letflatstoinnocentsinthelastfewyearsaregettingontheSippsbandwagonandover-hypingit。

Itwon’ttakelongforeveryonetorealisethatbuyingdirectpropertyinvestmentsthroughSippsisn’tactuallythatexciting。

Ifthechangeinregulationsdoesanything,itwilljustgivethemarketasmall,temporaryboost。

MS:Ithinkyou’reallabitoverexcitedaboutthebuy-to-letproblem。

It’sjusasmallpartofthemarket。

JamesFerguson:Thereasonitisvitallyimportantisbecausebuy-to-lethasupersededthefirst-timebuyer,oncethemaindriverofthehousingmarket。

Intheearly1990s,theaverageageofthefirst-timebuyerwas23。

Lastyear,theaverageagewas35,andeventhentheyboughtwithsomeoneelse。

Now,ifthebuy-to-letbuyersstopbuying–indeed,iftheystartselling–what’sgoingtoholdthemarketupthen?

MS:Whatabouttheshortageofsupplyinpropertyandthegrowingpopulation?

JF:Iwoulddefinitelyignoreashortageofsupplyinproperty,that’sacompleteredherring。

Ifthere’sashortageofproperty,thenexplainonethingtome:why,untilveryrecently,haverentsbeenfalling?

NB:Quite。

Ifthere’ssomuchdemandforproperty,peopleshouldberentingmoreandrentsshouldbegoingup。

Everyoneneedssomewheretosleepatnight,sowhereareallthesepeoplewhoneedhouses–particularlyfirst-timebuyersandimmigrants?

Wherearethey?

Thefirstthingyoudoatthebottomoftheladderisrent。

EdMead:Everyonefeelstheyshouldbeabletoownahouse。

JF:Why?

Whatthehelliswrongwithrentingandnotbeingonthehousingladder?

Particularlywhenitischeapertorentthanbuy–asitisnow。

Andallthisnonsenseabouthousesbeingalong-terminvestment:everytimeyouhearthatsomethingisadead-certlong-terminvestment,Iwonderifyouaren’tatacyclicalpeak,calculatingbackwards。

Ifyouremember,in1999equitiesweretoutedasbeinganabsolutelyguaranteedlong-terminvestmentthat,onaverage,alwaysrose。

Butwewereatashort-termhigh!

Lookbacknowandthelong-terminvestmenttheorydoesn’tlooksogood。

Don’ttouchanythingthatbecomesknownasalong-termbuy。

Youonlyevermakemoneyifyoubuyonthedowns。

Buyonthetopoftheups,itwilltakeyoudecadeseventogetbacktoflat。

Andthatismostdefinitelythecaseifyoarestupidenoughtobuyanew-buildapartmentwithaviewtolettingitouttoday。

TherewasasurveyoutfromNationwidetheotherdayshowingthat46%ofthosequestionedthinkitis“agoodtime”toinvestinbuy-to-letproperty。

Dearohdear。

EM:Idon’tdenythatthereisanoversupplyofthesenew-builtpropertiesNichasbeentalkingabout,butIstillthinkwehavetoseparatethemfromthe“Iwanttobuyahome”market。

Theencouragingthingforusisthatwe’vefoundthatdemandisstillthere。

Peoplestillwanttomoveandtheystillwanttobuy。

I’dalsopointtothefactthat,historically,therestofthemarkethastendedtofollowwhathashappenedinLondon。

AndinLondon,we’vehadacoupleofverystaticyears。

SothatiswhatIwouldexpectelsewhere,ratherthanthecrashJamesisalwaysanticipating。

Thatsaid,Ialwaysadvocatethatyoushouldbuyahouseasahomeratherthanasaninvestment。

Tobuyapropertypurelyforinvestment,ortouseitasamortgageequity-withdrawalpiggybank,isamug’sgame。

MS:AndJames,whateveryoumightsayaboutpricesinthemarket,first-timebuyersstillwanttogetonthehousingladderandthereisasuccessfulmarketwhenpropertiesarepricedattherightlevel。

It’sasurprisinglyactivemarketattherightprice。

Theproblemisthatsomanysellerswon’tacceptthelevewherepricesshouldbe。

Theywanttoomuch。

NB:Whydon’ttheestateagentstalkthemarketdownandgetpeopletoasrealisticprices?

EM:It’sstillaverycompetitivemarket。

Whateveryoumightthink,therearen’tthatmanysellersoutthere–everyonebelieveswhattheyreadinthepressandsotheywon’tputtheirpropertiesonthemarket。

Soifyou’reaseller,everyonewantsyourbusiness,sotheywon’tgiveyoualowvaluation。

They’llgiveyouahighonetogetthejob。

It’saterriblewayofdoingbusiness。

Thefactisthattherearetoomanyestateagentsaroundandoneoftheveryfewgoodthingsaboutadownturnisthatitgetsridofalltherubbish:yougetloadofpeoplegoingoutofbusiness,whichisfinebyme。

MS:Ithinkthat’sprobablymoreinLondonwherethere’sjustashortageoinstructions。

Inotherpartsofthecountry,there’splenty。

Therearealsoagentswhoappeartobeseeingsenseandencouragingpeopletoputtheirhousesonthemarketattherightprice。

MSW:WhyaretheremoresellersoutsideLondon?

MS:London’shadastagnantmarketforalongerperiodoftime。

Ifyouboughttwotothreeyearsagoandyou’renotmakinganymoneyonyourproperty,areyougoingtoputitonthemarket?

Probablynot。

You’vegottofundthemoveyourselfandyouhaven’tbuiltupanymoreequity。

EM:Ithinkonethingwedohavetobearinmind–andthisissomethingthatreallyhaschangedinrecentyears–isthecostofmoving。

Ifyoubuya£300,000housethesedays,you’relookingatpayingbetween6%and7%tomove。

You’vegotestate-agents’fees,stampduty,movingcosts,solicitors。

Putthatintotheequationanditisnowonderthatpeoplearesaying‘I’lljuststayhere’。

IwonderifGordonBrownrealiseshowmuchmoneyhemakesoutofpeoplewhomovebuyingwhitegoodsandallthatsortofstuff。

Ifhedid,perhapshewouldatleastcutstampduty。

MSW:Ed,you’rejustbuyingahouseIgather?

EM:Iam。

I’mbuyingahouseona25-yearlease–andthistellsyousomethingabouthoweasyitistoborrowmoney–I’vegota90%interest-onlymortgagefromtheWoolwichtodothat。

It’sextraordinary。

Still,Iwon’tturnintoabadbetforthem。

ThepropertyisinthemiddleofLondoninagoodlocation。

JF:Butisanythinginanylocationsafe?

Lookathowmuchhousingtransactionshavefallen。

Thisalwayshappenswhenabubblecomestoanend。

Theonlypeoplebuyinghousesarebuyerswhofeeltheyhavenochoice,menwhosewivesarepregnant,buyerswhohavejustcomebackfromabroad–theybuy,butdiscretionarybuyerswon’t。

They’rewaitingforbetterpricesandthey’regoingtokeepwaitinguntilsellersareforcedtodroptheirpricessubstantially。

MS:Itcouldbethatweshouldputfallingtransactionsdowntoachangeibuyers’habits。

Buyersaremorediscerningandtheycanviewthemarketmorecompletelythanbefore,thankstotheinternet。

Itdoesn’tmeantheyaren’tgoingtobuy。

JF:Seemslikeawholehandfullofstrawyou’vegotthere,Miles。

FredHarrison:Ithinkthatalotofthesepointsareprettyirrelevant。

Peopletendtoanalysethepropertymarketintermsofitsshort-termtrendsinsteadofplacingtheanalysisinahistoricalcontext。

Butifyoulookatthatcontext,youwillseethatlong-termpatternsrepeatthemselvesveryclearly。

Sounlesssomeenormousandnewvariablesuddenlycomesintoplay,wecan,withsomeconfidence,predictmajorturningpoints。

AsfarasIcansee,basedontrendsinthepropertymarketandinthelandmarket,bytheendofthisdecadewecanpredictarepeatoftheearly1990scrashandthe1974crash。

Rightnow,there’sstillalotofsteamleftinthemarket。

Ifhistoryrepeatsitself,themarketwillrecoverforafewyearsthencrash–asitdidin1989,givingusadowntownwithmacro-economicconsequencesof1992proportions。

Theworryisthatthenextfewyearswilldeceivepeopleintothinkingthatweareseeingasoftlandingandthattheycanbuysafely。

Theycan’t。

I’mafraidthisisgoingtoendintears。

Icantracethehistoricalevidenceforthisbackover300years。

Anddon’tforget,bytheway,thathousingboomandbustsnearlyalwaysprecedemajorrecessions。

MSW:Butwhatcanpossiblykeepthemarketgoingforafewmoreyears?

FH:Publicspending。

TheGovernmentiscommittedtospendingmassivelythrough2007/2008andthatwillkeepthingsbuoyant。

Peoplewillstartborrowingagain,encouragedbythisbuoyancy。

Andthebanks,ofcourse,arejustwantingtopourmoneyintoyourpocket,evenifyou’reacrook,soanyonecanborrow。

Withsomanypeopleconvincedofasoftlanding,we’renowintoaperiodofillusion。

Thewinner’scurse。

We’llbedrivenintocompetingforpropertiesatpricesthatwon’tmakesenseandthenit’llshutdownaspublicspendingstartstotailoff。

JF:YourtheoryseemstorestonGovernmentspending。

Butthey’vealreadyspentsomuch。

Canitkeepmakingadifference?

Doyouknowthatprivate-sectoremploymentactuallyfelllastyear?

Fell。

Weshouldbetalkingaboutunemploymentalready。

Theonlyreasonwe’renotisthatGordonBrownjustkeepsonhiringandhiring。

LC:Hecan’tkeepdoingit–thereisahugepublic-financingproblemlooming。

Wehavenochoicebuttoreinbackonspending,ortoincreasetaxes–andIthinkthattherewillprobablybeamixtureofboth–buttheproblemhastobeaddressed。

FH:GordonBrownwillfindawaytokeepspending,he’samasteratit。

JF:Brown’sgotthisgreatillusiongoingabouttheeconomicstabilityhehascreated–butitjustisn’ttrue。

He’sdrivenpensionstothewall,he’ssetupasystemwherewe’respendingallourmoneyinthegoodtimesandwe’vegotnothingleftforthebadtimes。

Andwe’reprobablygoingtohaveahousing-inducedcreditcrunchandconsumptiondownturn。

HecouldturnouttobetheworstChancellorever。

NB:In1989,GordonBrowncameoutandsaidtoLawsonintheHouseofCommons,“You’rebuildingupacreditboomthat’sboundtobust。

”Butnowhe’sdoing–andiscontinuingtodo–exactlywhathecriticisedLawsonfordoinginthelate1980s。

It’samazing。

MS:James,atourlastmeetingyousaiditwastoolateforinterestratestobalteredtosaveusfromthecrash。

Doyoustillthinkthisisthecase?

EvethoughtheGovernmenthasplanstoassistfirst-timebuyersandtheBankoEnglandseemsfinallytohavelinkedconsumerspendingwiththehousingmarket,andhenceismorelikelytocut,ratherthanraiserates?

JF:Itisabsolutelyshockingthatanyone,letalonemembersoftheBankoEnglandMonetaryPolicyCommittee,everarguedthatthewell-establishedvisibleandrationalrelationshipbetweenspendingandhousepriceshadbrokendown。

They’vealwaysmovedtogether。

Yes,theypoppedapartforsixmonths,butthat’shardlyevidenceofabreakdown。

Now,asanyonecouldhavepredicted,they’vepoppedbacktogetheragainaspressureonhousepriceshasledtoasavagedropinmortgage-equitywithdrawal,whichinturnhashitconsumption。

Let’snotforgetthat,atitspeak,mortgage-equitywithdrawalwasresponsibleformorethan8%oftotalconsumption。

It’snowfallenby60%in12months。

Nowonderconsumptionisfalling!

Everyone’srecognisingthebadnewsnow。

RememberMarksSpencer’scomingoutafewweeksagoandsayingthatitwouldbeatleastninemonthsuntilthingspickedup?

That’scodefor,“Wedon’tseeanyendtoitatall。



LC:IagreewithFredthatweneedtolearnfromhistory,butwealsoneedtonotethattherearemajordifferencestodayfrom15yearsago。

Oneisthatatthebeginningofthe1990stheBankofEnglandhadnochoice–orthoughtithadnochoice–buttoincreaseratestopreventinflationfromrising,sowesawasignificanttighteninginmonetaryconditions。

Thistimearound–ifthehousingmarketdoeslooklikeitisincollapse–theBankofEnglandcouldcometotherescuebycuttingrates。

Ourofficialinterestrateis4。

75%,significantlyhigherthanthatinanyothermajorcountry,sothereissignificantleewaytocut。

Thismeansthereisagoodchanceofasoftlanding。

And,bytheway,theBankofEnglandhasalreadyengineeredaslowdownofthemarketbyincreasingrates。

It’sverydifficultfromaneconomicpointofviewtopredictthatabubblewillburst。

Youcancertainlysaythesituationisoverstretched,andthatatsompointtherewillbesomecorrection,butIstillthinkthatalltheconditionsareinplaceforsomekindofsoftlanding。

Ifyoulookatthepricedata,youcanseeaprettyflatperformanceoverthelastsixmonths,whichsuggeststhesituationisheadingforsomekindofstabilisation。

I’dsaythehousingmarketwillperhapsdecline5%ayearovertwoorthreeyears,andbecauseofthattheeconomyoverallwillprobablygrowatapacesomewhatbelowpotentialfortwoorthreeyears。

JF:Youknow,Iwouldn’tbeconvincedthatrateswillfall。

Whenyouhavearecession,whathappenstosterling?

Itgoesthroughthefloor。

Andwhensterlinggoesdown,whichisalreadyhappening,whathappenstoimportedinflation?

Itgoesup。

Soyougetrisinginflationfromthereandatthispointintheeconomiccycle(whenprofitsareatapeak)workersdemandmoremoney。

Theunionsarealreadycomplainingabouthowsomeoftheirmembershaven’tgot‘average’payrises。

Well,wecan’tallhaveaveragepayrises。

Ifyourminimumpayriseheadsfortheaverage,thentheaveragegoesthroughtheroof。

Paydisputesarecomingup;you’vegotlotsofpeopletalkingaboutgoingonstrikealready。

It’sthekindofstuffwehaven’theardforadecade。

There’sgoingtobemorewageinflationtoo。

Andunderthosecircumstances,it’sgoingtobehardtocutrates。

FH:Idon’tseethatcentralbankscanstopcrasheseveniftheyareindependentandcancutrates,orraisethemwhenevertheylike。

NotethatthecentralbankintheUShasbeenindependentformostofthe20thcenturyandthatindependencehasn’tstoppedthemfromhavingclassicpropertyboom/busts。

WhyshoulditbedifferentintheUK?

Theotherthingwehavetorememberisthatpropertyboom/bustsarenowsynchronisedworldwide。

ThereisaclassichousingboominAmerica,Spain,Ireland,theNetherlandsandAustralia–andthelistcangoon。

Andnowtheyareallgoingtofallatthesametime。

Intherestoftheworld,interestratesareverylow,sothere’slittlescopeformanoeuvre。

Tome,thatsayswearegoingtohavethefirstglobaleconomiccatastrophebytheendofthisdecade。

JF:Themostimportantpointhereisthat,historicallyspeaking,housingbustpre-daterecessions–theyhitconsumptionandtheyhitconfidence。

Fallingconsumptioncausesunemployment(notethatretailemploymentintheUKhasbeenfallingforsixmonths)andthisscarespeople,sotheysavemoreandspendless。

Aclassicviciouscircle。

ThesavingrateintheUKisverylowindeed–ourstatisticssayaround6%,butwemeasureitdifferentlytootherpeople。

Ifwemeasureditinthesameway,itwouldbeabout0%。

Sothere’sscopeforsavingstorise。

Weallknowwe’reindebtedandoursavingsarepatheticallylow。

Theonlyquestioniswhatwilltriggerustosavemore。

In1989and1990,itwaswhendebtrepaymentshit22%ofdisposableincomes。

Thatnumbertoday,ifyouincludeunsecureddebt,is21%。

Soifyoulookathistory,thatsuggeststhetimeisn’tfaroff。

Also,Ican’tagreewithyou,Lorenzo,thatcuttingrateswillmakeitOK。

Ratesfelleveryyearfrom1990to1996andthepropertymarketfellalongwiththem。

Oncethecrashstarts,cuttingratesmakesnodifference。

LC:Inthatcase,maybe。

ButthatbustwascausedinthefirstplacebytheBankofEnglandincreasingrates–whichisn’thappeningnow。

JF:Butassoonashousepriceswerefalling,theywerecuttingratesand–andIneedtoreiteratethis–itdidn’twork。

Wedon’tneedratestorisethistimetocausethebust。

Notwithpeoplethisheavilyindebt。

Ispoketosomeoneatoneofourlargestretailbankstheotherdayandhetoldmethattheaveragehouseholdbankingwiththemhasonly£750inliquidassets。

That’slessthanamonth’ssalaryforalmosteveryone,andmeansthatwhenthebustcomesandunemploymentstartstorise,thereisnothingtofallbackon。

That’showrecessionshappen

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