For discerning readers I may not need to say more. However…
The above chart shows prices taking into account inflation. Even nominal prices fell in the early 1990s by c 15%. It was NOT because unemployment had risen – that came after the crash. It was NOT because interest rates were high – rates FELL by around a half during the crash.
It was because speculators, who had driven up prices by buying, buying, buying stopped, er, buying. Thus, prices dropped as demand fell away. Who were the speculators in the boom up to this year – Buy-to-Letters. There are now around 1,000,000 BTL mortgages (compared to 1998 when there were just 30,000. Yes, just 30,000!). Last year alone saw over 300,000 BTL mortgages taken out.
But no more. The Bank of England interest rate has risen 9 times since 2003 and 5 times since August 2006. The worldwide credit fiasco has resulted in the global credit crunch – of which Northern Rock was simply a local symptom. (Anyone who believes it was the cause does not understand global economics.) The result of the crunch on BTLs is that lending is so tight now that they can’t get the loans they obtained just 6 months’ ago. And those who do get an offer of a loan, get it at higher rates than before. It simply is not worth subsidising your tenant in the vain hope of capital gains, after c 13 years of incredible rises.
Indeed, The Royal Institute of Chartered Surveyors (i.e. estate agents) tells us that BTLers are flocking to offload onto other ignoramuses – they hope. This is a classic example of the Greater Fool Theory of Investing – where the buyer believes there will always be an even more stupid person around the corner. Of course, eventually, as in all Ponzi schemes, the suckers are the ones holding the baby. That will be around 300,000, at least, who bought last year then.
The Council of Mortgage Lenders forecasts 45,000 home repossessions next year. That will depress the market. (Though I forecast more like 55,000.) Yet they also say that prices will grow next year. Goodness knows how. Perhaps by magic!
The amount of debt in our society is literally astronomical and this will impact hugely in the coming economic downturn. As a society we have little savings to see us through. Remember Joseph: ‘Seven years of plenty followed by seven years of famine.’ All asset bubbles eventually crash. According to The Economist, ‘the global housing bubble has been the biggest asset bubble in history’.
They said that a crash couldn’t happen in the US. Well, they now have the biggest crash since, are you ready, The Great Depression of the 1930s. Also, Spain and Ireland are in crash mode. Most other western countries are not far behind – especially the UK.
Prices in the UK have risen some 200%+ over the last 12 or so years.
I forecast a 30-40% fall over the next 4-6 years. Some regions will be more.
Prices are already falling in most, if not all, parts of the UK and this will continue for some years. If you don’t believe it, try selling a house. The biggest faller will be Northern Ireland as it grew 400% in the boom (say that again to yourself slowly). NI will experience the largest regional fall of around 50%.
I think London will have the next largest fall due to the fallout of the City – though the second largest fall could be a number of regions - it’s a close call as so many have had huge rises. With tens of thousands of redundancies, in EC2 and Canary Wharf, over the next year or two, how many BTLs do you think this will affect? Or owner occupiers who have to sell up to live?
It will not be pretty. It will be grim. Gordon Brown talked about ‘no more boom and bust’. Well, the bust was just deferred.