November 23, 2005

Confidence in UK Housing Market Falls (Again)


I spent most of the summer in London, and will be living there next year (and renting!). A 1000 sq. ft. flat is about $1.2 Million in central London. And rents for $2000 a month.

Guess what. That doesn't compute. But the ponzi scheme went into full effect there, out of control, and it's been slightly declining last year as owners refused to sell at the correct price, thus listings up. Now you'll see the full pop in 2006. Good market to consider for what you'll see here - we're about 8 months behind. Joy - Jubilation - Concern - Worry - Denial - Panic - Capitulation. They're in Denial, moving to Panic in 2006. We're in Worry.


Despite strong returns from equities so far this year, and an apparent ‘soft landing’ for the UK housing market, the latest investor confidence index from the Association of Investment Trust Companies (AITC) is a gloomy read.

The research suggests that the UK’s love affair with property investment is on the wane, whilst this year’s stock market rally seems to have made active investors jittery rather than jubilant.

Whilst 30% of the general population said they still thought the housing market would produce better returns than the stock market over the next year, this represents a sharp drop on the 40% who said this last February and 53% who said this in January 2003. In contrast just 9% of active investors agree the housing market will outperform

12 comments:

Robert Coté said...

Yes, housing prices have gotten -way- ahead of rents. Rents are lagging costs of ownership because rents always lag changes in cost of ownership [up and down]. Home prices are updated monthly. Even month-to-month rental agreements don't change monthly and if one did it would drive away customers. I set my rents ahead of market by 5-10% and resist making any changes. I get higher quality tenants who are rewarded for stability and on net I am not losing anything as transaction costs would eat up any potential higher rental income. I'm also going to keep my renters in a downturn as it will take more for any pull backs to make their deal worth abandoning.
I guess what I'm trying to say is to not put too much weight on the owner/renter divergence. Indeed the extreme run up in purchase prices these last few years will continue to pressure rents for years to come as any new units coming to market will be carrying those greater costs in a period where more and more people are likely to prefer to or be forced to rent.

keith said...

you're fine because you likely purchased your rental units before the run up - otherwise you'd be losing your shirt right now

good point on lag though

but it makes no sense to lose 50%+ per month - and that's what people are doing who bought property to rent in the last 2 years

PE ratio on stocks = cost of ownership to rent for housing

and either housing goes down or rents go up

Robert Coté said...

Housing Panic you got it spot on. For instance; one mountain cabin rental property had the mortgage burned 3 years ago. Anyone who bought post 2001 for rental purposes deserves their fate. My point wasn't about luck/timing but that the aggregate rental housing stock wasn't bought last month or even these last 4 years, you know, the price to which they are being compared. Again, it works in both directions. For at least the next 4 years therefor the typical rental charges for a rental unit will continue to increase. Median, average and all that don't apply in this instance. Worse, the AMT creep will make more of these units less cash positive for many owners at current rent levels. Worse as you know there hasn't been enough low end housing built for nigh on a decade. Worse people like me aren't going to invest at next bottom because we see a demographic bust for the low end properties. Worse a very few but generally respectable people see a geographic bust. The houses are not going to be where the people want to be. For instance, I cannot imagine owning anything in Orange County. 969,484 DUs and maybe 200,000 with any quality of life value. Contrast this with nearby Ventura County. 251,712 DUs and desireable for at least that same 200,000. Funny thing, in 1970 the two counties were virtually indestinguishable by most census measures including population and housing. That's the geographic bust, houses where people don't want to live. Go to the other end of the country and look at this future already unwinding the millions of virtually free houses in Detroit, Buffalo, Rochester, Erie, etc. Third corner of this triangle, places like the Phoenix area or the SoCal Inland Empire where they exist on the physical edge of the bubble. Why commute an hour and a half when the core hollows out and the commute is 20 minutes for the same purchase price?

My prediction? Heck, ya got me. Rents are going to way outpace inflation. Purchase prices are going to decline by any traditional metric. I'm not going to be hurt. Beyond those, no way to tell.

Wes D said...

According to the Economist, UK housing is in a pretty severe funk right now.

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