Home—Blog—The pressure on struggling home owners will only get worse
Nov 11, 2010, 02:19
Posted byMerryn Somerset Webb
Comments (16)
Something extraordinary has just happened. The phone rang. I picked it up and found myself talking to an estate agent who had just taken on a house she thought I might be interested in. You might think that is of no interest whatsoever – after all until a few months ago we were in the market for a house. But it is interesting simply because when we where looking no one ever called us with a house.
Not only did estate agents not bother to call us after a viewing to see what we thought, they didn't bother to call us when something new came on the market. They waited until we saw it on the property websites or in the paper and called them.
So what's changed? The balance between supply and demand. When we were looking there was very little supply. So if something good came up it sold itself. Today there is plenty of supply. Back in early 2009, the average estate agent had around 62 properties on its books. Last month that number was near 80. That means that the agents left on our high streets are back to having to work if they want to sell.
The problem? It is very hard work indeed: not many of the 80 sellers per agent are prepared to cut their prices to levels that make their houses an easy sell in these mortgage-tight times. Indeed, in the face of all logic, Rightmove reports that the average vendor actually increased his price by 3% in October.
If I was selling a house at the moment I'd probably be dragging my feet a little if I could, too. After all, if you do manage to sell and you then suddenly find yourself with a big pile of cash, what on earth are you going to do with it? If you put it in a savings account, you will get a 100%-guaranteed negative real return after tax and inflation. And if you put it in any kind of financial asset, you'll run a very high chance of making more than just a nominal loss. No wonder transactions are down around 7% on last year.
But the key to what will happen next is surely the fact that not everyone has the luxury of feet dragging. A year ago, Shelter reported that 10% of mortgage holders were "constantly struggling" to meet their payments. This year, the same survey puts the percentage at 18%.
Repossessions haven't been as high as expected when the financial crisis first kicked off (thanks to super-low interest rates), but they are still running at the highest annual levels since the mid-1990s. And the number of people more than 12 months in arrears has trebled in two years. And with food and energy prices rising (thank you quantitative easing…) there is every reason to think it might treble again.
Not all would-be sellers are desperate, obviously. But more and more look like they are becoming so. Maybe they'll cut their prices? Or if they don't, maybe the banks will cut the prices of the repossessions they will eventually have to sell on.
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(11 November 2010, 03:17PM) Complain about this comment
That EAs behaviour can be summed up in one word, panic! The insiders I speak to in the industry know what is coming and are waiting for what ever trigger may be. There are so many economic & geopolitical traps out there, it is the proverbial minefield, you can almost take your pick.The hot money is on an oil shock sending the price to $150-$200 within the next few months. The inflationary & IR fallout would send the housing market over a very steep cliff.
(11 November 2010, 06:40PM) Complain about this comment
Traditionally, few property sales occur during the winter period, early November to late February, and it would be unwise to draw many conclusions over the next few months from media reports of 'slumps in sales'. What happens in March and April next year will determine whether or not there is going to be a bust in property for the whole of 2011 and onwards."If you do manage to sell and find yourself with a big pile of cash, what are you going to do?" Buy another property with it of course. Most sales involve people trading up or down... so that's partly why sellers are presently unwilling to drop their asking price.... because they will have to buy into a market where no one else is dropping their price. So, they are waiting to see what will happen next year... if prices fall then they also will concede, because their next house will be correspondingly cheaper. They will also sell cheaper because they fear prices will be even lower next month. It is mechanical thinking.
(11 November 2010, 08:15PM) Complain about this comment
JAW, You are right of course that most people sell to buy. But based on the emails I get, increasing numbers of people are selling to rent. They are the ones who worry about what do with the cash if they actually do sell.
(11 November 2010, 11:17PM) Complain about this comment
Merryn: Your point taken.There is a difference in strategies between forced sellers and unforced sellers punting to rent and come back later to buy cheaper property, with a hoped for capital gain. Property prices would probably have to fall by at least 10% to make the strategy successful? You would have to deduct from the gain (1) Rents at 4 -5% of the house price and rising, although the economic downturn may limit that. (2) Inflation at 3% and rising. (3) Sale and purchase costs, with the varying rate of stamp duty payable the critical factor. On the plus side is the interest or gain in the cash invested.In the present currency wars buying Canadian Dollars, Brazilian Reals, or Norwegian Krone (all commodity inflation rich), and Swiss Francs (Hedge Funds relocating) may be good places to park cash for a year or two? Agents report forced selling discounts of 30-40% on property prices in the PIIGS. Coming here also? Maybe not quite so much.
(12 November 2010, 11:44AM) Complain about this comment
We are already transitioning into the new reality - where Estate Agents and sellers behave differently. The thing that keeps the pretense in place is ultra low interest rates. The longer they hold rates down then more sudden and severe the carnage when they rise.Property ownership is a cohesive influence on society; and with high levels of repossessions will come an angry destructive mentality that we imagined to be confined to history.
(12 November 2010, 12:51PM) Complain about this comment
Don't agree with JAW that rents are a factor right now in sell to rent equation. I've been renting since moving location in 2005 (didn't buy because the bubble even then was obvious - though it took another two years to stop inflating). In that I'me I've spent around £50,000 in rent that's true ... but each of the two houses I've been living in have easily fallen more than £100k in the same period (the first having been on the market since 2007, finally selling this month at barely £20,000 over what it was bought for in 2002).This is a far worse negative return than what you get in a building society and with the big falls still to come, selling to rent is (even now) a good option.I'm looking for a property around the £400k mark. A 20% fall is either a much, much better place, or £100k I don't need to pay back (with interest). Holding off right now is a no-brainer.
(12 November 2010, 01:39PM) Complain about this comment
Just to agree and add to Monty99's comments, there's also the significant point that as a tenant you don't have worries around the cost of maintenance and repair of a property. ok, you keep it tidy and clean subject to fair wear and tear clause, but the landlord has the problem of fixing roof leaks, broken white goods, subsidence, buildings insurance etc etc etc. So that's a few more grand saved over say the five year period. Plus compare the cost of the evil stamp duty - even if 'only' spending £400,000, your tax bill is £12,000 - plus legal and related costs - as against say £150 for the letting agent printing out a standard AST lease.Last few years, renting has been no-brainer. Once the low interest rate rug's pulled, and the bubble starts to deflate, house buying may make sense, but not for a few years yet.
(12 November 2010, 07:02PM) Complain about this comment
The burning question of the day... to rent or buy?In: "What next for Britain's property prices?" None of the panel of experts forecasts a drop of 10% plus next year, which implies, if they are right (and they were wrong last year), that any property owner selling now, renting, putting the cash in an investment, expecting property prices to fall enabling them to buy cheaply again later, pocketing a capital gain.... is going to be disappointed. The strategy will very probably fail. House price fall will occur but not sufficient to cover the costs of renting and erosion of capital by inflation etc. As the years go by it gets worse... rising rents and inflation erosion compounds. You fall further behind.The principle of renting is simple... if the landlord has bought at a reasonable price, and with secure financing.... it is the tenant who pays the interest on his buy-to-let mortgage, not himself. You buy the house for him.Why not buy the house for yourself?
(13 November 2010, 01:36PM) Complain about this comment
We are heading for a long term down turn.Economics is simple and just look at any high st be it in a norther town or southern town.What do you see??Simple nothing to let signs closing down and no real shoppers yes people are in the towns but they are not spending.The real concerns are no pay rise and higher costs.Vat up in Jan and fuel costs up both Petrol and gas and elec.Food prices up.Everything is pushing is to a long turn down term.Ask what do we make and what can we sell.Look at all the products in the shops non made in the Uk.We are a gross importer.We are bust and the £4.8 trillion debt is just not fixable ever.Thus gold can and will only keep going up in price.
(15 November 2010, 11:49AM) Complain about this comment
Sweeping statement.....try this in Prime Central London. I'd bet my mortgage this article would have a different sound. UK property market is now tiered, talking about the "UK property market" isn't helpful to anyone. We need regional reporting on this.
(17 November 2010, 11:07PM) Complain about this comment
I agree , reading articles on whether to buy or sell or rent etc is an ambiguous process unless these articles actually focus on regions and even boroughs ,i would like to buy in west London yet are these articles focusing on my interested area's ? No ! there is no point in headline articles predicting 20-30% declines in house prices if that is only going to occur in say the usual area's such as the north of England as i have no interest in what house prices are up there.Until there is a real focus from the experts on specific markets then most of there comments are not worth the paper they are printed on !
(23 November 2010, 04:46PM) Complain about this comment
@Jut - unless you are a cash buyer then regional differences are irrelevant as it is the supply of credit which will determine house prices. This is a national /international publication - if you want a borough focussed outlook read the Kensington Parish Newsletter ! If you are a cash buyer, then simply working out cost of renting multiplied by time, versus potential/likely depreciation over time will give you a good signal to buy or keep renting. For those who are not cash buyers - ability to save for higher deposit after rental costs vs interest rate obtained with higher ltv over time and purchasing a property you can actually afford not what you necessarily think you are entitled to! Not exactly rocket science, is it ?
(23 November 2010, 06:45PM) Complain about this comment
Ask yourself Merryn, with inflation rising and threatening to get out of hand, where is the best place to keep your money?1. In a bank account paying 3% interest gross?2. In the stock market, perfectly capable of crashing 50%overnight?3. In a house, a known and proven lon term hedge against inflation?Unpalatable options all, are'nt they
(24 November 2010, 12:12PM) Complain about this comment
Many factors lead to real estate prices. Some of those factors are about to take a very big hit. The UK must enforce tough austerity measures (the alternative is pig swill). Most people underestimate how serious the UK's problems (and also the PIIIGS) are. Many wages must and will be cut. Many taxes must and will be raised. Interest rates must and will rise. These factors - Wages, Taxes and Interest - affect real estate prices. People will simply have less money to spend. In stage one, many sellers will try to hold on to their prices, but the forces will be too large. Stage 2: Watch for very significant falls in 2011 and 2012. Stage 3: the country has to make many changes, these will take time and there will be lots of resistance. The recovery will be many years away. We are facing an era not experienced since 1930. Most EA's, fin planners, investors and others won't get it; they will keep referring to the investing lessons of the 60s, 70s, 80s, 90s or 00s. This is very different.
(24 November 2010, 06:06PM) Complain about this comment
@Anthony L! I totally agree! I don' t think individuals appreciate the situation we and the PIIGS /Europe are in, and how it will affect us! Buying a property is entails more than just buying it but all the other related and indirect cost to it. Personally, if you are sitting on cash buy gold and then use the gold to purchase property directly when the time is right. Gold after all is MONEY!!!
(25 November 2010, 08:23AM) Complain about this comment
Thanks Vinnie76. I won't be buying gold. It may perform very well, but I only invest when I am certain. I am not conviced gold will. I am convinced real estate will fall very significantly simply because for the first time in decades, people will have much less money. Austerity is the opposite of stimulus or quantitive easing. It sucks money out of the system.What am I investing in now? I purchased over 100 investment properties between 2003 and 2008 (Honestly). Since 2008, I have been aggressively selling properties. I'm reducing debt and increasing cash (CAD, Swiss, Japan Yen, some USD more recently). Then waiting...
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