Property 2008 Prediction – were we right?

We predicted property falls in 2008 of between 5 and 10% (based on the average house price index). In fairness we had felt that house prices were due to stabilize or start to go down in 2007. They did in fact, over the year of 2007, continue to go up on average. It was getting to the point where the public were beginning to believe the rhetoric of Brown, that there would be ‘no more boom and bust’.

Of course, everyone knew this was a boom, but they chose to rationalize it by finding reasons why it should go on up over ‘the next 20 years’ some tabloids reported. What rubbish! Any boom must be followed by a bust. The general public had simply forgotten, or did not remember, the two previous crashes. In the press there is too much reliance on ‘experts’ (usually who are interested parties making money in property) who say that the ‘fundamentals are different this time’!

What exactly is so different about affordability or average salary against average house price. What is different about unsustainable debt or high loan to values? Yes, first time buyers have been largely replaced by buy to let investors, but many have relatively large gearing and rely on rental income.

No, the main thing that I could agree to that was different, was the lax lending practices that have allowed unsuitable amounts of money to be borrowed by ordinary people. Multiples of income were ignored as new (made-up) affordability ratios become the key, due to greater disposable income. Rather than save the extra, people were encouraged to spend and borrow more as low interest rates and the low cost of living led to an extreme, probably once in a lifetime situation. The government were doing the same!

Some cite low interest rates as a catalyst, and I would agree, but I would counter that they were always unsustainable. Furthermore low interest rates are normally associated with low inflation and low salary increases, so justify why house price inflation should have been so extreme – anything up to 6 times the rate of salary growth.

In 2005 I sold my house in the UK and started renting; I felt that property growth had become an unsustainable bubble and that fundamentals were no longer there. This was 2 years before the turning point in August 2007 and many acquaintances thought I was making a ‘brave’ decision. I predict that by the middle of 2009 that decision will no longer be viewed as anything other than correct. Yes, I could have waited a year longer but actually, in the area of the country I sold in, there was little extra growth in that period and I was saving more by being out of the market and investing my money in other areas (like Europe) where I invested in a property before sterling’s weakening. At the moment I have made 4 times as much than if I had held on in the UK; and I have stability and further growth.

So what did I think at the end of 2007 about the UK property market?

In September 2007 there was still widespread confidence in the market, and I wrote:

“The nail in the coffin for UK property would be one or more of four things:

1. Lenders making it more difficult to borrow, or restricting loans to good ‘bets’
2. Unemployment rising, and thereby consumer sentiment changing.
3. The Buy to Let bubble bursting if people cannot make money in the short term.
4. Increasing mortgage payments as fixed rates end over the coming 9 months

I expected the answers to these questions to take many months to feed through, but then we were in December (2007) with a few of the answers:

1. Lenders are making it more difficult to borrow, and are restricting loans to good ‘bets’, whilst decreasing Loan to Value (LTV) percentages - and they have turned to being conservative on property valuations
2. The one I least expected to happen was (2). However, whilst unemployment is unchanged the fact remains that consumer sentiment is changing. On the Times website a typical comment is “Houses of all kinds were vastly overvalued by any measure, and simply driven by expectations of further increases”.
3. Fundamentally, ‘Buy to Let’ only works if you have a good level of equity in the property, or a rental income is in excess of debt and maintenance payments, or finally, rising house prices. For too long rising house values have hidden the other fundamentals. So, by projecting 2 or more years of house price stagnation then the only profit investors can make is net cashflow. In too many cases this figure is actually a minus! Let us hope that they have a risk plan in place.
4. It is increasingly reported that people are struggling with increased mortgage payments. However, there has been a further issue added, which is due to the continued issue of illiquidity; it is now actually slower and more problematic to re-mortgage. There are stricter criteria, including LTV equations that are going to leave some people isolated on much higher repayments.

(Written December 2007) “I question those voices arguing stagnation of 0% in the coming year (2008). As an example, if a property was worth £100,000, then indices during the last 3 months show it to be worth at least 2% less on a conservative basis, or £98,000 (end of 2007). Therefore, that property would need to grow in excess of 2% over the coming 9 months to remain neutral over a one year period (3 months have already gone). If one allows for 3% inflation as well, the property would have to grow by around 5%. Does anyone believe this will happen in 2008? The average city hedge fund is forecasting a 7% drop in house prices (or 10% in real terms!). A double digit annual decrease was not even experienced in the two previous housing ‘crashes’.”

I wrote all this in 2007, way before any ‘expert’ had even admitted that houses would reduce in value in 2008. One other thing I did in the same letter was I mentioned the way in which the government had mis-handled the economy and the serious danger of inflation and further massive growth in government debt.

Yes, I feel fully vindicated by my decision in 2005 and believe that I was accurate in 2008, simply because I did not listen to the ‘experts’ and relied on ‘common sense’.

James Pearcy-Caldwell

Dated 18 June 2008 – valid for 6 months. Aisa Direct Ltd, authorised and regulated by the FSA as Independent Financial Advisers. 1 Fordbrook Business Centre, Pewsey, SN9 5NU

* This newsletter has been prepared with all possible care to ensure its accuracy. It is based on our current understanding of legislation and HMRC practice. 

* Neither Aisa Direct Ltd nor any of its employees can accept responsibility for any errors or omissions. You should seek further professional advice prior to action.

This should not be deemed as individual advice and you should seek further information particular to your individual circumstances. For further information, contact AisaProfessional on (01672) 569111.