Are you ready for a rapid price correction of Britain’s housing market

2nd May 2016 / Editors Picks, United Kingdom

Many industry commentators say that the housing market in Britain is as robust as ever due to some basic fundamentals, mainly the supply and demand rationale as there is a clear ‘housing crisis’ driven by a restricted supply causing increasing price escalation. Of course they said that before the last two major price collapses.

House prices, like any market is affected by market sentiment and it looks as though sentiment is rapidly changing.

There are now several factors adding up at the same time that is overtaking experts opinion.

The Panama Papers scandal has revealed nothing new. It has however put increasing pressure on the UK government to stop the scandal of illegally gained cash to be furrowed into residential and commercial property. The worlds despots, dictators, bandits, swindlers, charlatans and fraudsters have literally dumped hundreds of billions in the UK property sector, both residential and commercial. With renewed public there political pressure to unearth property ownership these transactions are already showing signs of a dramatic slow-down.

Then we have Britons themselves. Home ownership, due to price escalation has turned the home ownership aspiration into nothing more than a dream for most youngsters, and by youngsters in terms of property ownership we’re talking under 35 years old. Contrary to government statistics George Osborne has become increasingly desperate to help first time buyers with ever more ridiculous methods of propping up the market at taxpayers expense.

According to a report two months ago by think tank Resolution Foundation home ownership is effectively the equivalent of a 10 pence in the pound tax increase against take home pay. And take home pay has only increased 3% since the banker led financial crash of 2008 we are all still suffering from to this day.

Back in 1995, just after the last property crash, middle income households spent 18% of their salaries on housing, today that figure is almost double for the average household. Only higher income households are spending 18% on housing, leaving by far, the vast majority with less and less to cope with the daily struggle of living. Two decades ago housing was considered affordable, today in many towns and cities across the UK just 9% are considered affordable.

However, in April this year property prices rose just 0.2%, this representing one of the fastest declines in a while.

In another study for the Royal Institution of Chartered Surveyors (Rics) a conclusion was reached that international investors have been put off by the possibility of the UK’s exit from the European Union. Probably polite talk for the same scrutiny and transparency issues referred to earlier.

The BTL [Buy-To-Let] sector, which has been snapping up a full 20 per cent of all new homes from the market in recent years has become so overheated that Osborne decided to implement a few tax changes. The result was a rush at the market and then a sudden fall in activity. A wealth of new policy changes, such as the reduction in tax relief for landlords from 2017 is likely to exert some degree of downward pressure.

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Meanwhile, Land Registry data for March 2016 says there has been a 0.5% decline in England and Wales house prices to 6.7%, bringing the average house price to £189,901. In London, there was a 0.2% rise in prices to reach 13.9% a year and the average price in the capital is £534,785, according to the same Land Registry House Price Index.

But an ominous warning sign of trouble ahead is that the number of housing transactions that took place in march beat the all-time high in 2007 by 11 per cent and was a whopping 69.7 per cent higher than the same period the year before.

Government statistics show dramatic increase in volume of property transactions as housing market reaches its peak

And that month was not just a blip, it was a really big blip.

The housing market in the UK is over-heated and due for a correction

Just a few days ago The Telegraph reported on the housing market with its headline: “House prices fall almost everywhere as property market takes on ‘uncomfortable’ feel.” Just two days before that Business Insider reported “Britain’s property market is going to implode as housing nears peak affordability” and before that “House prices set to fall after April, warn experts” and “Mortgage lenders show UK house prices heading in opposite directions” from other national newspapers. The are the headlines of a sentiment changing.

Is the perfect storm brewing? International investors with their ill-gotten gains and illegal tax haven stacks of cash are looking for new places to hide their stash now that British tax authorities are being forced to look a bit harder at ownership whilst the homegrown aspirants have been out-priced in just about every city across the nation. Buy-to-let investors, with a voracious desire to protect their wealth adding to the competition are now considering the effect of new tax regimes placed upon them now and from 2017. Once the idea that house prices in Britain are no longer sustainable, prices will fall.

Tax hike sees lowest growth in London’s prime property market for six years” – is yet another headline. Here the London mayoral election and the EU referendum are being blamed to add to the fermenting pot of troubled times ahead.

The only thing keeping the housing market going now is George Osborne. As IBTimes reports “House prices need to fall, but ministers fear the wrath of millions of homeowners.” The result is that, unwittingly, the UK taxpayer is pouring billions into what will turn out to be a sub-prime implosion but for now – full on market manipulation by any other description.

First, the Bank-of-England distorted money markets with a near on Zero Interest Rate Policy (ZIRP) forcing anyone with cash savings to invest. This drove one fifth of all house sales to be snapped up by future retirees into reluctant buy-to-let investor/landlords. With dodgy tax havens and retirees trying to protect future income, nearly 40% of all property sold in the UK today is bought in cash.

In what was nothing more than a political soundbite to help struggling first-time buyers, two bogus house price escalation schemes were cooked up by George Osborne in the guise of Funding for Lending and Help to Buy. The former dramatically failed and ended up lowering mortgage rates, the latter forces the already overcommitted taxpayer to underwrite £12 billion of mortgage lending to people who haven’t got an adequate deposit of their own, or who lack the income to have a go at producing one and who therefore shouldn’t really qualify for a mortgage at all. To help struggling buyers even further, the taxpayer is now burdened with another £835 million in subsidies with the Help to Buy Isa – a tax free Isa and top-up scheme to help create a deposit. In other words, not only does the the state help financially but is actually acting as guarantor to help first-time buyers become one.

It goes without saying that large numbers of older households have benefited from decades of unabaited house price growth who now hold substantial amounts of housing equity. This creates an incentive for government to preserve house prices at existing levels or higher as it’s a vote loser when house prices decline. It’s also a vote loser if the children of those older households are unable to leave home due to high house prices – the irony!

But all this market manipulation will result in a correction in the end as property prices cannot keep rising forever and when they fall, prices will typically over-correct before investors come back to pick up the scraps of misery provided by repossessions, auctions and fire sales. And let’s not forget the huge numbers of people caught for years in the ‘negative-equity trap’ of the early 90’s. In some areas of Britain, this is already a reality and newspaper headlines have already started on what will become reality for many thousands when prices start to tumble:

Negative equity but need to sell: Your options

House price horror: Thousands caught in homes trap

We can’t predict the exact date of a housing market correction, but we know it will happen – that is not a foregone conclusion, it’s a fact. The only other option is that wages dramatically increase and given that in real terms, average wages have increased by little more than 0.5% per year for the last 8 years, there’s no chance of that whatsoever.

Graham Vanbergen –

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