UK House Price Crash In Progress!

Nadeem,

I have been reading your UK House market analysis on marketoracle.co.uk with great interest. I agree with you the housing market is undergoing a 'crash' at this moment, and the current average house prices (£180,000) has scope to fall by another £20,000 even before bottoming out. I wanted to gain your views on the best strategy in this situation.

I see my predicament as the epimity of the current situation. I brought for £185,000 in March 2008 (3 bed house in Milton Keynes) and the current marrket valuation is £179,995. I believe the valuation has scope to fall to £170,000 by end of the year with a similar decline next year.

I put down a cushion of a £25,000 deposit, but have already lost £5,000 on the decline in the value of the house. There is a further combined loss of the fees and improvements to the house of £10,000 on top. However with the average house price potentially crashing to £170,000-160,000 by this time next year (leading to a total paper loss of £35,000), would the best strategy be to sell now?

The bank where I work is going offshoring programme and there is a strong possibility this will affect my job next year. My intention was to sell the house and move this time next year due to requirement to find new work, probably in London. I don't see any way to remain in the current house for much longer than 1 year owing to the work situation and lack of suitable employment within a reasonable travelling distance. Season ticket for travelling from MK to London cost's £5-6,000 a year in any case.

I believe selling now may minimise the effects of further house price devaluation (to my current £15,000 loss) and also save on mortage outgoings by renting for the next 1-2 years (net gain up to £10,000). With the market bottoming out maybe by end 2009, 2010 may be the time to venture into the market again, probably in London.

Your views would be much appreciated to try make sense of the best strategy in these troubling times.

Hi

I think the mistake that you have made here, is to buy the property as a short-term investment for just 1 year rather than as a home to live in for many years.

As you agree with the opinion that house prices are destined to continue falling for sometime therefore your ‘investment' will lose money both in nominal terms and also in real terms as inflation during the next 12 months is destined to average at least 4.5% in RPI terms, therefore a forecast house price drop of 7.5% plus 4.5% suggests a real terms loss of value of 12%.

Without giving you specific advice you on your current predicament, what I will say is that when I am Investing in an asset for example shares, I always have a stop-loss level on which to liquidate the investment, as the minimum requirement for any investment is for it to hold its value against inflation, if it fails to do so then your money is better off being in a bank savings account rather than be invested.

My view is that the housing market will continue falling in real-terms for many years, i.e. on adjusting for inflation, perhaps for as long as another 8 years before there is a real –terms bottom, rather than a nominal bottom which would occur earlier. This will have the effect of making buyers increasingly reluctant to buy for investment, unless their primary focus is to buy the property for as a home rather than any serious investment potential.

The following article analysis the gain / loss of renting or investing in property during a bear market. http://www.marketoracle.co.uk/Article5296.html

NW.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

How can a 2% drop over a month or a 6% fall over 3 months be a crash ?

A crash happens in one day such as the stock market crash, the housing market cannot crash !

Hi Sam

The housing market moves far slowly than the stock market, ignoring tick pricing, the stock market is priced by the minute, therefore a trading day of 7.5 hours can have 450 datapoints over which to complete a move, whereas the housing market data is released on a monthly basis and therefore there exists only 1 data point per month. On its own a single data point is not significant, however the UK housing market has been in a downtrend for 10 datapoints where the last 3 datapoints have seen a fall of 6.1%, which extrapolates into an annualised rate of decent of 24.4%.

This rate of decent can be labeled as a CRASH in progress as a housing bear market ranges from an annualised rate of between 10% to a gain of less than the rate of inflation as house prices that fail to keep pace with inflation are still technically in a real-terms bear market, which can result in a greater loss of value than the original price fall. The following article illustrates the impact of inflation on real terms house price trends http://www.marketoracle.co.uk/Article5033.html

Back to the current situation, an annualised rate of decline of 24.4% is a market that is in a crash mode. This has near immediate effect on sectors linked to the housing market as we are witnessing with the building, and mortgage banks sectors as well as estate agencies.

NW.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

houses gained 200% in many cases so a fall of 9% is not significant. Only those who bought during 2007 could be looking at a loss the vaste majority are sitting on huge gains, this is just scaremongering!

Ron.

A 9% fall from the highs against a 200% gain represents a loss of 27% against the initial purchase. Remember that a loss from a high is from a much larger number than the gain from a low.

I.e.

100,000 plus 200% = 300000
300,000 less 9% = £273,000

27000 of original £100k = 27%

Also inflation erodes the real-terms value of the gain in house prices i.e. 300,000 peak value for a gain over 5 years would equal a real-terms gain of - 300000 less inflation X 3.5% per annum average (RPI) 251000 real gain at peak 151%
Less current year real terms loss of 37500
Current value in real-terms 213500
Real terms gain to date has now fallen to 113.5%

At the same pace of declines in another year real-terms gains will have fallen to 78%. With house prices down 25% in real-terms from the peak on an inflation basis of 4.5% per annum (RPI)

NW.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.