The point of this post is to outline how I perceive what will happen to the housing market in the UK (and likely other countries too) given certain variables or facts. The problem with this is defining the facts in the first place and what the actual impact of said facts are - rather than what someone thinks who has read the facts incorrectly and used them to generate some news.
I don't think anyone will disagree with the fact that the UK housing market is in a bit of a pickle at the moment - from almost every angle. Right now, there are a few facts to consider which I am going to cover in a bid to outline why the UK property market is having the problems it is, how they might be corrected at the moment and how they might be avoided in the future.
- UK House Seller Fact 1:
Houses have a price on them (obvious I know, but bear with me)
- UK House Seller Fact 2:
The majority of houses are bought using a mortgage or credit of some sort.
- UK House Seller Fact 3:
House prices are almost always dictated by the seller at the end of the day. An agent might say that’s too high or that’s too low but ultimately the seller decides.
- UK House Seller Fact: 4
When a house is sold, the selling price is also dictated by the seller. If the buyer offers too little, and the seller thinks they are taking the proverbial, the seller doesn't sell and the transaction doesn't take place.
- UK House Seller Fact: 5
Not every house listed for sale is priced correctly/accurately. See Fact 3. Basically I might have a studio apartment I want to sell in Bognor Regis. Being rather ambitious I might decide I want to list said studio for sale at 1 million pounds. We all know it isn't going to sell at that price, but nevertheless, I can list it at that price if I want to.
Given just these 5 House Seller facts, we can already see there are a few issues. It would appear that house prices are controlled pretty much by the sellers.
If these were the only facts that existed, everyone would know where everybody else stood, and the property market on the whole might be a little clearer to understand. The fact remains however that this is not the case and there are more facts to take into consideration from two (perhaps rather reluctantly joined) sides - buyers and mortgage providers.
- UK House Buyer Fact 1:
Most buyers know that in bad times, houses will sell below their listing price.
- UK House Buyer Fact 2:
Whilst buying the ideal home at the right price is the aim, this rarely happens. Buyers pay a little more than they want, or if they don't desperately need to move, they will wait until the right thing comes along.
- UK House Buyer Fact 3:
Most properties are bought using some kind of leverage. Be that a mortgage, a personal loan, or a family loan of some sort.
- UK House Buyer Fact 4:
The easier it is to obtain credit, the more houses are sold, and the higher the average transaction value, and subsequently prices across the board will rise.
- UK House Buyer Fact 5:
When credit is more difficult or more expensive to obtain, fewer properties change hands, and the housing market stagnates. Over a sustained period of tight lending, house prices begin to fall.
Now, if only the House Buyer Facts existed, the same would apply: an easier market to understand in which lending dictates not only the supply and demand, but also drives value up and down accordingly, depending on its state at the time.
The reality of course is that we don't live in Utopia, and the UK is not a state-owned council estate where prices are dictated at a central point or by a market maker.
I appreciate at this point that there will be the questions of what about all these property investors? Well, if they are using credit to fund their property purchases, they are encompassed within the set up here. Cash buyers (home buyers or investors) don't really enter into the equation at all, because they play no part in the equity chain. If a cash buyer buys a house with a suitcase full of banknotes, it makes very little difference to the amount of debt outstanding in the property market. Of course, if everyone at the same time suddenly bought houses in cash and paid in full, this would be another article entirely!
With these two sides in place, the only remaining points are from the lending side of the deal. Whilst I am not from a mortgage background, I will attempt to list which facts pertain to the interests from the mortgage provider fraternity and the impact of them.
- Mortgage Fact 1:
They are regarded as pretty much a fact of life and a necessity when it comes to buying a property - presenting very much a captive market situation.
- Mortgage Fact 2:
The mortgage industry is able to be flexible about what it lends on, how much it lends, who it lends it to, and how much it charges for the pleasure.
- Mortgage Fact 3:
Although under the guise of being heavily regulated, Mortgage Fact 2 actually proves they are not. If they were, all mortgages would have the same conditions, and you would either qualify for a loan or you wouldn't (NINJA loans and self cerification would not exist either)
- Mortgage Fact 4:
Mortgages are huge revenue generators, and are (in the UK anyway) only available from commercial entities (banks, building societies etc.) or businesses.
- Mortgage Fact 5:
As a result of all of the previous Mortgage Facts combined, a situation arises where the vast majority of house buyers are controlled by the mortgage industry. Although not often, the banks occasionally get caught out by lending more money out than the assets on which they hold liens are worth - the result being either government bail-out, or, collapse of the bank.
With all three sides of what perhaps should only be a two sided deal, we start to see where the housing problems really are. No-one holding a physical asset (i.e. a property) is actually in control. Holders of hard cash know this, and will in most cases take advantage of it and buy up property from stricken sellers that need to move.
One more bonus Mortgage Fact to take into account is that banks are able to rinse their debt. For example; if a bank ends up with a lot of toxic assets or debt, it will conveniently package them up and flog them on at a discount to the next institution to retain some liquidity to lend out even more money.
The whole point of this though is to show where the fundamental problem lies in the house price market.
If lending rules are too lax the sales and marketing bods at the bank go on a brainstorming session at the nearest champagne bar and cook up new products to fit the market and add the charges accordingly to the product in the form of fees or a higher interest rate.
The problem with this format is that like any snake-oil business, everyone wants to have the slickest product that helps out their customer the most, and still makes a great return for the company.
Having highlighted this problem though, it does in turn throw up another. All these shiny mortgage products pave the way for OPM (Other Peoples' Money) investing, where in a nutshell, you borrow money to invest in something, (allegedly) make a profit, and all is good.
OPM investing sounds great, but the problem here is the lack of limits in which you have to pay back the loan - basically the lifetime of the mortgage.
If you invest in stocks or gold for example, you can do so on a margin account using leverage or gearing. Same thing as OPM investing you might think, but the key difference is that margin and leverage borrowing will have much shorter time limits attached (Like a month or three months) in which to pay back, otherwise the whole deal is closed and you are pursued for the debt or your collateral is acquired by the lender.
Over all, if you take the facts outlined above, it is pretty clear where the issue really lies with respect to the stagnation of the UK property market. Lending.
As much as this suggestion might not go down that well, the logical solution is to restrict lending (even regulate) if needs be. The property market as a whole is under the thumb of the banks, and with the banks being businesses; they are out to make a profit.
If excessive lending is bought to a halt, several things will happen as a result: some good, some bad but, the end, I believe justifies the means.
On the down side, first time buyers will struggle to buy. This however is negated later by the other effects of lending restrictions.
By tightening how much can be lent, and ensuring that the borrower can pay it back, it will naturally reduce the amount of exposure by the banks.
It will also reduce the number of buyers short term, this in turn will encourage more realistic pricing of property by sellers.
When the banks release there repossessions back into the market, this will increase availability and further pull property prices down.
All of this could likely be achieved in 6 months, with the effects in total probably lasting about 12 months at most.
Most of the debt that has initially been created by the banks in the first place will dissolve as it always has done by sweeping it under the carpet.
It will be tough, times will be hard, but if the banks carry on the way they are - selling debt to consumers for more than they can afford - we will just end up in an ever-increasing vicious circle.