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171 : Why a crash is unlikely in the UK

11-10-2007 team


There are 22.5 million households in the UK. The population is 60 million. Total mortgage debit is £1.4 trillion. Total value of the housing stock is £4.3 trillion. Therefore the average mortgage level is 30%. Equity is 70%. This partly explains why there is currently very little panic in the UK housing market. And surveys suggest that even if prices dropped, the UK consumers spending patterns should not change significantly.  Add to this the meager 200,000 homes being built in the UK every year, whereas the population is growing by 300,000+ a year and households are progressively getting smaller, and you can see why prices should be supported by a lack of supply and firm demand.


Prices have doubled in the last five years. But equity has increased so much that most home owners would still have positive equity if price dropped by 25%. As long as the Banks do not crash and burn and stop lending and/or mass unemployment takes hold, there is not likely to be a fully fledged house price crash. Yes, prices could drop by 10%, but this is off the back of a tripling in prices in the last 15 years.


Add to this Alistair Darling’s tax reducing from 40% to 18% on capital gains tax, and we can see continued steady activity levels for investors in 2008, albeit all the spook stories are likely to put off the first time buyers. Who would blame them – no-one wants to buy their first home on the top of the market. For all those investors with large portfolios, cash in the bank and re-financing opportunities, a down market may be rather helpful in achieving some good deals from hard pressed sellers and making sure yields improve from current rather low levels. Consolidation in the sector one could call it. 


Make sure you have a war chest of cash available. And be disciplined with putting in very low offers - because you will need to protect your downside risk and make sure that, even if prices drop say 15%, you will still have positive equity from any new purchase.


The landscape is changing with high oil prices as well - so dont buy property in remote locations that are an hours drive from any shopping centre. Best head for the lead energy intensive areas like London - this is where the highest GDP per unit of energy is creating. London is the least likely to be damaged by the coming oil price shock, along with the oil city of Aberdeen.


Good investing - and we look forward to developing the strategy for 2008. Be careful as the credit crunch continues and make sure you have plenty of cash in reserve to steady the ship and take advantahe of any good investment opportunities in any downmarket that may develop by year end.




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