UK Property – Flogging a dead house?

Few things get the British fizzier than talking about house prices. It’s a national obsession that has led the country into an economic (tree-lined) cul-de-sac. After lockdown, the real estate hawkers are back with shrill predictions about ‘the market’. Here we provide an independent perspective:

1. The UK is in its worst recession for 300 years. Technically this is a depression. This may mean that the long-term trend for property prices is downward. The property market is frozen and the British economy has contracted by at least 16%.
2. Nobody really knows what the drop in prices will be but  25%-40% over seven years depending on the property and the real costs of the pandemic seem rational. Intuitively it could be more than 55% in some areas.
3. Property prices are driven predominately by the availability of bank credit and in the current environment banks and lenders are pulling out of the mortgage market. Due to their withdrawal (and the reluctance of those who have remained in the market to lend) loan to value ratios are going up significantly.
4. Banks don’t want to catch a (very sharp) falling knife so they have raised the level of minimum mortgage deposits. *  
5. “But interest rates are low and not going to rise so…” It’s not your ability to pay the interest – it’s having the wages necessary to repay the capital cost over the full term.
6. Redevelopment costs are increasing because supply chains have been disrupted and builders are passing these costs on to customers. Building costs are forecast to rise 20% over the next 5 years. Wanna flip a fixer-upper anyone?
7. Unlike in a boom – in a housing bust – prices become increasingly linked to employment and salaries in specific areas. If unemployment increases – which it will – it’s inevitable that house prices, and demand, will fall accordingly. **
8. “But the government will restart the housing market.” How? Stamp Duty holiday? More Help to Buoy? Builder bailouts?

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Will these giveaways really create demand?

9. “Okay… BOMAD!” The bank of mum and dad isn’t actually a bank and like other mortgage lenders is now closed for business.
10. All this talk about a mass urban exodus to the countryside has a little catch. Who are all the current city dwellers going to sell their overpriced property to so they can buy a place in the sticks? There are no foreign buyers.
11. Britain has a dirty little secret: buy-to-let… but it’s no secret that buy-to-let is a busted flush and landlords are trying to quietly get out. The reason you’re not allowed to shout ‘fire’ in a theatre is that the exits are small and the large audience scrambles to get out. Someone shouted fire in their rent-seeking theatre. ***
12. People talk superficially about the three D’s: Debt, Death and Divorce which all affect housing. But another three D’s at the macroeconomic level are: Deflation, Demographics and Dislocation (financial markets). These are significant headwinds for real estate.
13. “But it’s all supply and demand prices will stay high because of the lack of supply”. Contrary to popular belief a shortage of housing did not contribute to house price increases between 1996 and 2018. More supply on its own may not bring prices down, but it will increase the number of vacant properties.
14. Actually, there is an oversupply of housing in the UK which will significantly increase when office and commercial space is converted into (“luxury”) residential units.
15. When a surveyor values a property there is a set process.  Within that process, they will use comparisons of sales of similar properties, but most importantly will consider ‘any other factors that may influence value’. COVID-19 is such a factor. Most surveyors will predict prices will go down but to where? You can have all the valuation logic in the world but ultimately this is a subjective judgement call. 
16. Inquiry’s, property searches and website traffic are just that. They are not offers, sales and transactions.
17. Predictably estate agents foresee a very small fall and a V-shaped recovery as we get back to ‘business as usual’. Some independent analysts predict a precipitous fall and an L shaped ‘recovery’ as we won’t return to ‘normal’ because the biggest asset bubble in human history is not a ‘normal’ market condition.

Most important point:

FIRE and The Media Real Estate Complex

This might be a new concept to you but it’s vital you understand it – especially now. FIRE stands for Financial, Insurance and Real Estate. These three sectors rely on ever-increasing prices and transactions to survive. Now think about who relies on the FIRE sectors to survive: the media. Their outdated business model needs all the revenues from the FIRE sector’s advertising budgets.   

So, at the heart of the media real estate complex, there is a massive conflict of interest. And this is the reason you are seeing so many articles and commentators talking unrealistically about property.

Breathless headlines, opinion passed off as analysis and a view that the property market is simply immune from wider economic trends. In these precarious times The Media Real Estate Complex is not your ally.

Expensive housing is bad for the economy, equality and for entrepreneurs.  

The quicker we get back to making things and providing services that the market needs, which create value and enrich people lives the better.

Using private debt to flog each other overpriced bank owned ‘assets’ has been a colossal distraction. Many estate agents will now be thinking about retraining as teachers, starting an indispensable business or leaning to code etc. Great. We need people who can now add value. That’s how we begin to get out of this mess.

Lastly – you have to make up your own mind about what is going to happen to property prices. Some or maybe all of the above might be incorrect but none of the above has been compromised by taking the Media Real Estate Complex shilling.

Footnotes:

* Remember when you get a mortgage it is the bank that owns the property – not you. You just have an agreement with them to live in it until you have repaid them the money you’ve both agreed on. That’s why your home is at risk if you do not keep up repayments.

** At the moment, the Government’s furlough scheme is protecting the wages of 6.3m people whilst one in seven homeowners are midway through a three-month mortgage holiday. 

*** It was the UK government who shouted ‘fire’ in the rent-seekers theatre. Buy-to-let landlords are selling up and Air B&B super hosts are getting super hosed. 1 in 3 landlords (often amateur) are selling due to changes in legislation and tax relief changes. The ban on tenant fees hasn’t helped these parasites nor have soaring costs and, of course, those bothersome tenants who are refusing to pay rent during the pandemic.