REAL ESTATE

Why it is a poor investment at the present time

Placed online by 

Alex Paterson

http://www.vision.net.au/~apaterson/politics/real_estate.htm

Updated 4 April 2009




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INTRODUCTION

Below is an article written in 2005 by a consumer group in the United Kingdom (UK) called 'First Time Buyer Help' regarding the parlous state of the UK real estate market as of 2005.  Although specific to United Kingdom real estate, the points raised in the article apply to most of the rest of the world. Given that the predictions voiced in the article have come to pass as of 2008 I have elected to mount the article on my website as the original URL is now defunct. 

For an update on the situation in 2009 see the following article by Robert Winnet of the UK Telegraph:
House prices 'could fall by further 55 per cent' by Robert Winnett (Telegraph UK)
Quote: "House prices may fall by a further 55 percent and there is a very real probability that Britain will be bankrupted, a leading investment bank has warned in a private note to clients." 

Alex Paterson (March 2009)


Why You Should NOT Buy A House In The U.K. Now

Original URL: http://www.firsttimebuyerhelp.co.uk/articles/article.aspx?id=3 (now defunct)

Author: Webmaster 2005

The short answer is because property is very overvalued at present, and prices are overdue for a large correction (or “crash” as it is often said).  This means that, should you buy now, you are at a significant risk of negative equity.

Various estimates have been made about the extent of the over valuation (and there are local variations, of course).  Some property "experts" think that property is not over-valued at all, and think that property prices will carry on rising.  Others, such as Roger Bootle of Capital Economics thinks that property is overvalued by 20%.

We would estimate property is on average 40% overvalued, and the market requires a drop of that amount to bring the level of First Time Buyers back to their historical average.

In simple terms, this means that the average house currently on the market for 100,000 should only be worth approximately 60,000 if long-term and established house price trends are observed. If any First Time Buyer were to take out a mortgage now at current price levels, it is not an exaggeration to say that in the event of a crash, you would most certainly regret the decision for a long time to come.

We are currently in the biggest house price bubble in recorded history – a phenomenon that incidentally is worldwide and is not just unique to the U.K.

To explain why you should not buy now, you have to look at what exactly has happened to the property market in the last 5 years. The property boom of the last 5 years has brought us to a situation where house prices have never been more expensive in real terms than they are today. So, if you compare house prices to other goods and services in everyday life such as milk or bread, By “real terms”, it is meant that the relative price of a house compared to the average things we buy every day such as bread or milk has never been higher.

The graph below (source: Nationwide) demonstrates this effectively.


In the above graph, you can see that the whole market has seen swings and troughs since the 1970s.  The last property bubble and subsequent bust of the late 80's early 1990s can be seen quite markedly. But it's hard to take your eyes away from where we are today.... today's prices adjusted for inflation are terrifying.  The blue line (prices adjusted for inflation) is currently way higher than the red line (the long term trend). 

And as you can see, the market stagnation of the last year is represented by the small blip at the end.  Given what you can see from past patterns on this graph, it surely doesn't take too much to realise what is going to happen next.  Just because house prices have doubled in value over the last five years, does NOT mean they will double again.
But that is exactly what Vested Interests would like you to believe.  The whole market can't move unless houses are priced at a level where people can buy them.  Interest rates will not be moving downwards any further, and as can be seen the ratio of earnings to house prices is even more pronounced than the last bubble :-

The above graph shows Gross Earnings related to house prices.  Because earnings have not risen at anywhere near the rate house prices have been rising, then the amount we have to spend on houses related to our incomes has never been higher.

2005 First Time Buyer Help.co.uk



ABOUT ALEX PATERSON

Alex PATERSON is an Australian citizen by birth. He writes articles and advises on issues pertaining to aviation, politics, sociology, the environment, sustainable farming and forestry, history, computers, natural health therapies and spirituality.

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Photograph of Alex Paterson