UK House Price Crises | Banking Direct

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UK House Price Crises

I remember attending a dinner party 3 years ago and being faced with horror and a few giggles as I sat (pretty confidently) and answered questions about why I had sold my house just outside London and moved into rented property and bought gold. The house had trebled in value in 7 years and I was basically called crazy for selling it...if it's done this well...just think how much you are losing? There were 2 property developers at that party (new property developers) who outlined all the reasons why I was making a mistake. "Houses only ever go up", you can't go wrong with bricks and mortar" etc. I could literally hear the words of their estate agents coming out of their mouths...it was other worldly. Ahhh, the fall back lines when logic deserts!

We talked about blackjack and the Martindale system of betting...which is what they were doing in the property market. The Martindale system is almost flawless. It states that all you have to do in a game of roulette is to double your bets every time you are wrong. You will win eventually. And this is statistically true. Almost flawless. The only flaw in the system is that you are much more likely to run out of money before the casino does if you hit a bad run, which is made more likely the longer you play. The same is true in the property market. Being able to withstand the losing sequences means that you must have the capital base to withstand the downswings...and few newer buy to letters have that capital base.

The origins of this housing crisis lie in a far from equilibrium position. The housing market at its fundamental level is governed by two things...wages and rents. When it's cheaper to rent than it is to buy AND when average house prices have moved up and far from the historic earnings multiples, a crash is never far away. It has to be this way over a long period. The opposite is also true...when house prices are lower than historic earnings multiples and renting is more expensive than buying, as it was in the mid 1990s, then it's time to buy. The earnings and the rental cost rules always pull the market back into position.

There are winners in this housing debacle and there are losers. The winners are people who sold early, first time buyers who looked at the housing market in utter frustration during the bubble and people who now have to upsize. The losers are those how bought too late in the cycle and find themselves in negative equity and those who have or will lose their jobs.

The amateur property investor is likely to lose his shirt as he doubled down during expanding prices...expecting the good time to last forever as they squeezed more and more first time buyers out of their dream. What they would give for a first time buyer right now.