An interesting addition to my posting from yesterday re Issue 7 – Banking incompetence and the effect on Consumer Confidence.

It seems that Barclays agree with me!

http://news.uk.msn.com/uk/article.aspx?cp-documentid=12082219

My thoughts on falling house prices

I was taught in economics class that the price of an object is affected by both the supply of that product and the demand that exists to buy it. The price can be forced upwards by reduced supply as long as sufficient demand exists. We were in a market where demand for house outstripped supply (alongside other effects) and so the price increased . Now we are in a market where the demand is ebbing away and therefore prices are dropping. So what is causing this drop in demand?

Issue 1 – the credit crunch
Currently, the lack of mortgage funds available to buyers is the most significant force in falling demand for housing. According to the Council of Mortgage Lenders, Gross mortgage lending reached an estimated £14.6 billion in November - a 22% fall from October and a 51% fall from November last year. (Source 1)
Up until summer of 2007, there were many competitive products out there eager to lend with 100% finance packages and high multiples of income. However, now that the banks themselves are finding it hard to raise finance, they have cut back on their own lending by removing many of the less ‘safe’ mortgages and increasing the interest rates on others. Higher deposits are also making it harder for the first time buyer to afford a mortgage.

Issue 2 – The ratio of house prices to incomes has risen to an all time high pricing first time buyers out of the market
In the UK the ratio of house prices to incomes has almost doubled since 1970 – for example, London average house prices are 4.8 times income (2006), against 2.6 times in 1970 (source 2). This means that many potential buyers are struggling to be able to get a mortgage based on their income levels, even assuming a mortgage is available In the past this problem was got around by banks being willing to offer 'generous' mortgages (e.g. interest only, self certification, 100% mortgages). The credit crunch obviously has had an effect on this availability of credit.

Issue 3 – Speculation in UK housing market.
Because traditionally the view a house is that it is not just an asset, but a place to live in, house prices won’t rise and fall due to speculation like the stock market will. However a lot of demand for UK housing has come from buy-to-let investors. Many buy-to-let investors purchase with the long term view; however, now that prices are falling, some of these speculators are likely to leave the market causing a significant drop in demand and a further increase in supply of housing stock.

Issue 4 – the Volatility of the UK housing market.
The UK housing market suffers from a lack of available housing as a propertion of the total housing stock because the number of new houses being built at any time is relatively small. This is an island of limited size, but increasing numbers of single home dwellers is putting further pressure on the existing stock. It only takes a small rise in demand to increase prices but similarly it could only take a small fall in demand to cause significant price falls as we are seeing now. High demand over the last few years has led to an increase in the number of homes being built, however it takes time for this stock to feed through to the housing market. This means that now there is a glut of unsold new builds which are further reducing the price of existing stock.

Issue 5 – UK economy is sensitive to any change in Interest Rates due to personal debt.
There are record levels of consumer borrowing in the UK which is a combination of mortgage borrowing and personal debt like credit cards. The total level of debt the total amount owed by consumers on credit cards, loans and mortgages hit £1.444 trillion for the 12 months to June. Even more worryingly, in the same period the country's gross domestic product (GDP) stood at £1.41 trillion.
Therefore even a modest rise in interest rates could have a very adverse effect on consumer confidence and spending. Therefore the housing market is particularly vulnerable to any rise in interest rates that may occur - even if it is only through an increase in bank rates (as opposed to base rates). Also, even though the Bank of England has cut interest rates, many homeowners are not seeing these rate cuts passed onto them.

Issue 6 – Predictions for House Prices and the UK economy as a whole
Many economists predict significant house price falls. This in itself can have a downward effect on house prices. If buyers think that house prices are going to continue to fall, they will delay buying in order to get a better deal! This reduction in demand coupled with the supply of houses remaining unsold being high is a downward force. Furthermore, gloomy predictions for the economy as a whole and increasing unemployment levels make people nervous about the future and less inclined to risk a move unless they have to.

Issue 7 – Banking incompetence and the effect on Consumer Confidence
The problems at British banks including Northern Rock, HBOS and many US banks have severely dented consumer confidence in the Mortgage industry and made buyers even less inclined to ‘take the risk’.

Issue 8 – House Prices can Fall - even with limited Supply.

For those who believe house prices can never fall, it is worth considering the case study of Japan. In the 1980s there was a similar boom in house prices in Japan, howver, since the peak of 1991 house prices in Japan have fallen for 15 consecutive years.

So where does that leave us?
This is not an easy question and I do not have a functioning crystal ball. There are pundits who say 2011 will see a recovery, others that say this could last another 5 years. What I am certain about is that 2 things have to happen before we will begin to see a recovery:
1. Money has to start flowing again. There can be no demand without finance.
2. Buying has to become more appealing than renting. Whilst rents are falling and finance is hard to get, why buy now? Wait until the market ‘bottoms out’ and then buy before it starts going up again.

Source 1 Council of Mortgage Lenders

Source 2 Mortgage Guide UK

Source 3 Money High Street

So now the year is coming to an end...

and it is time for reflection. This time last year I had never heard the term 'credit crunch' and recession wasn't even suspected and I was searching for my first development property. I made an offer on a place last December, but the full building servey showed up so many issues it would have been a money pit and so I pulled out.

I started the year full of optimism. I found a house that was sorely in need of some TLC and the mortgage was no problem to sort out (though it took slightly longer than expected because they were so 'busy' at Natwest).

I am ending the year in a very different world! People are loosing their jobs and house prices are tumbling, so impecable time as usual! However, I am hopeful. The falling house prices are largely a byproduct of no money circulating round the system. The original inflating pressure on house prices was the lack of housing stock and this problem has not gone away. Infact, with building working stalling on many sites, this can only get worse. Once the money starts to flow again houseprices will begin to recover. So I just need to hold on until then. I have a tennant at the moment who pays the mortgage and then some... so as long as it stays full and I keep working hard things will eventually come good.

So this Christmas I shall be raising a glass to the future and hoping that by 2010 I will be ready to take the plunge and do it all over again! Courage friends and may Santa bring you the 2009 you wish for!

what have I learned?

Well this has been my first project and I have learned an aweful lot of lessons that I can carry forward onto my next project.

1 Plan everything - plan the purchase, plan the development and most importantly plan how you are going to spend your money and your time. Budget and schedule are paramount to the property developer. I thought that I had a healthy budget, even including a contingency of 10% but even this turned out not to be enough.

2 Stay focused. It is easy to get emotionally involved in the property and end up adding expensive touches simply because you have always wanted one. You have to decide if the expensive wooden floors would not only appeal to your target buyers, but will they be willing to pay more for it?

3 Stay sensible. Make a list of the of all the jobs that you want to do and then sleep on it! Price each job and then decide if the job more than pays for itself in increasing the asking price. Always undertake essential work, being sensible about adding favourite touches and then completely ignore the unnessarily expensive ones.

4 Be realistic. You are never going to achieve a sales price considerably above the ceiling price in an area by simply adding more 'things'. If you are renovating a 2-bed terrace, fitting it out like a penthouse suite may actually alienate some of your possible buyers. And spending more on the development will not necessarily mean you will make more money on the sale!

5 Remember the 3 important numbers in property developing - the amount you bought the property for, the amount you spent on it, and how much you can sell it for. Everything else is eye candy! Keeping focused on this is what seperates the amateurs from the professionals - and this is not an easy game in a falling market.

FINISHED at last

I cant believe it. It is finished!!! It took some time dressing and hoovering and I finally finished cleaing the kitchen at 6.15pm with the first house warming guests arriving at 6.30! Talk about taking it to the wire but it had to be done. I knew that if I didnt create an 'unmissable' deadline that this project would drag on and on. This way I could kick the workers up the but and get them to finish off those little touches that have made this property such a success!


I am so proud of my brother and my dad - and of myself and Paul. This has been a family effort and I am amazed at what we have been able to achieve.



Well done guys

What was I thinking??

What was I thinking?? I have arranged a house warming party for next week so this has to be finished. Dad is moving in to the house this week to get it done - despite there being no gas until the gas man cometh to switch the boiler back on. The gas man appears to be the MOST unreliable man in the universe - having let me down 3 times now. At least I haven't paid him yet for the stuff he has already done so he HAS to come and finish off.


The fireplace is being delivered on Wednesday and the carpet is being delivered and fitted on Thursday. This leaves Friday for a tidy up and hoove and a relaxing Saturday getting ready by dressing the house (I wish).


As always Dad and Tim have been fab and the whole family has been helping out with Julie and Lix going around tidying up bits of paintwork. This has been a real family affair and that has been part of the pleasure.

I know that this next week is gonna be tight but it has to be done if we are ever gonna get done!

Kitchen

Well the kitchen is pretty much finished now and it looks fab! Paul and I spent many many many hours on the internet choosing a cooker and hob that we could afford that also looked the part. In the end I found Kitchen Science where I was able to get a cooker and hob delivered for less than £275 which was astounding. We also sourced a delightful little chimnel extractor fan which was reduced from £150 to £75 at B&Q.

It just goes to show what a little research can do!