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Shahla
Money Managing Guru
Joined: 13 Nov 2004
Posts: 3324
Cash Points ££ 126163.28
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 Posted: Tue Nov 06, 2007 5:19 am Post subject: UK House Prices - Primary Reasons For a Sharp Fall |
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y: Nadeem_Walayat
The Market Oracle expectations are for the UK housing market to fall by 15% over the next two years. However this decline is not expected to be a gradual trend but rather periods of stagnation punctuated by sharp falls which could be of more than 5% in a single quarter! Therefore this article looks at the primary driving forces that could lead to sharp falls in the UK housing market.
1. Buy to Lets Mass Selling
Its a numbers game - The fundamental approach to buy to letting is for the rental income to cover the mortgage and all other costs associated with managing a property. Whilst 10 years ago, buy to let investments were a no brainier, i.e. a virtually cannot lose investment producing yields in many cases in excess of 10%, today's yields have by and large fallen below the costs of servicing buy to let loans. This is especially true for the most recent entrants that banks such as Northern Rock were more than happy to sign up right up to the first major blow out from the credit crunch in June 2007.
An estimated 1,000,000 buy to let mortgages have been taken out, up from barely 20,000 10 years ago. This illustrates the size of today's the buy to let market.
There are two main reasons why this million strong army of speculators could trigger a sharp drop in the UK housing market:
a. The Yields - As I have already mentioned the yield available today from rentals ranges anywhere from 3% to 5% of the value of the property. Add in costs of insurance and management / maintenance and the yield reduces by a further 1% to a range of 2% to 4%. Therefore whilst portfolios built up during the early years of the housing boom are more than manageable in payment terms, i.e. when houses prices where half their current price. The fact is that buy to letters can earn far more yield from high street high interest savings accounts of upwards of 6% without any of the associated time spent on managing properties. The only incentive to retain property portfolios is the expectation of capital gains. If this expectation evaporates then there would be no point to buy to let investments.
Buy to let costs 2000 Buy to let costs 2007
Average property Cost £84,000 £200,000
Average rental income £6,000 £10,000
Yield 7% 5%
Net Yield Less Management Costs @ 1% 6% 4%
Buy to let mortgage (100%) 6% 6%
Net Profit / Loss 0% -2%
Value of Net cost (Annual) £0 £4000
Off course recent buy to letters over the last 12 months that number more than an estimated 100,000, risk falling into negative equity. This associated with a rental income that does not covers costs, could trigger a wave of selling hitting the market so as to cut losses .A recent BBC report featured on "All About Money" demonstrated that many buy to let investors in the Flats market are already being hit by negative equity with associated rental yields not covering loans and therefore investors being forced to sell at losses of over £50,000 on properties originally valued at £200,000.
b. Government Tax Changes on Capital Gains - Gordon Browns Darling in all his wisdom has probably done more to set a date for a crash in UK house prices then any one could have imagined. Basically Alistair Darling has cut the capital gains tax on property investments from 40% to 18%, effective from 1st of April 2008. The effect of this would be that those sitting on fat profits built up over over recent years now have an incentive to sell to lock in profits whilst they can. Whereas in the past the incentive would have been to hold onto properties for many more years to benefit from taper relief which would reduce tax liability from 40% to 24% over 10 years.
Whilst many market commentators view this tax change as a boost for the Buy to Let market. What it effectively means is that there will be NO tax incentive to hold onto properties. This will to some degree support the market in the lead-up to April 08, with the expectation for a large number of buy to let properties coming to the market in April 08. More so if the housing market continues to weaken.
2. Foreclosures (Repossessions)
UK repossessions rose to 17,000 by the end of 2006, and are on target to to more than double this year to over 40,000. The expectations are that 2008 will see the rate of repossessions double again to 80,000 as declining housing market impacts on the economy. Eighty thousand repossessions in 2008, would be more than the peak number of 75,000 repossessions during the last housing bust in 1991. As a sign of how shocking these figures we only need to turn back to the Council of Mortgage Lenders own forecasts of January 2007, which forecast 19,000 repossessions for 2007 and 20,000 repossessions for 2008.
3. Home Owners Downsizing.
http://www.marketoracle.co.uk/article2588.html |
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