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189: UK and US investment update - crash or no crash?

03-24-2008 team 


For the last ten years, UK doom-mongers have been calling a house price crash. This started in 1999. It seems the people most emotionally vocal are those who own one or no properties at all. They have a vested interest in trying to talk down the market in the hope of telling everyone “I told you so” – looking smart. It’s easy to keep calling a crash year after year without any recourse. They also hope to jump onto the housing ladder in the hope of waiting for prices to drop – then picking up a bargain. But unfortunately it has not happened. For all those property investors, it can be a bit unnerving to here a chorus of nay Sayers calling for a crash – it catches headlines.


What property investors cannot afford to be is either smug or arrogant – these two traits normally lead to investors reducing their returns or worse still, going out of business. But one has to take a balanced view then “go with what you personally believe in”. Don’t listen to all those doubting Thomas’s out there. When was the last time you heard a family or friend actually encouraged you to purchase a property? – it’s very uncommon. Normally we get “I wouldn’t do that, it’s too risky” – or “I think you might fail at that” or “the market’s bound to crash, so you’ll loose a fortune if you invest now – I wouldn’t do it if I were you!”. Well, you are not them and they are not you. You are an individual private property investor – and you need to follow your own intuition.


The best investors invest when everyone is saying no – and sell when everyone is saying buy! Look at Warren Buffet. He must have a confidence barometer in his office – when it’s cold he buys, when its hot he holds or sells.


So what about the UK market?


We thought we would try and help by listing the positive aspects, then listing the negative aspects, then you can make up your own mind.






As GDP drops, interest rates should also drop which should stimulate property prices. Inflation remains an issue, but high oil prices have so far not impacted the economy as much as most economists had thought it would. Meanwhile, unemployment is not so far rising. Employment remains strong. In London and southern England in particular, there is no sign of any economic hardship. So overall, we do not believe there will be a house price crash. There could be an easing of prices by -5 or -10%, but this is off the back of increases in London last year of 12-25% and the rest of the UK of ca. 8-10%. Property prices have tripled in the last ten years in many areas. This was primarily due to lower inflation, lower interest rates, lower priced borrowing and thence improved affordability. In 1990 – the time of the last house price crash, interest rates shot up from 6% to 15%, unemployment doubled and there was a recession for two years – but still prices only dropped 20% after doubling the previous 5 years. So without higher unemployment or many big banks going under, we cannot see a house price crash.


For anyone wanting to buy their first property, it’s a risky time to buy at present. For those with a portfolio of 5 properties and gearing of <70%, it’s probably worth being on the look out. For the larger portfolio investor with over 20 properties, is probably a good time to pick up some bargains!


Interesting to note a not very widely publicized report by Rightmove that showed property asking prices rising a healthy 0.8% in the last month to 24th March. This was after a 3.5% increase in the month to 20th February. Time for properties to be sold also dropped. Hardly looks like a house price crash. We also don’t see a hugely strong link between the US sub-prime issue and the UK market. If one looks at the US situation, foreclosures have tripled in the last year whilst in the UK they have gone down. Remember Greenspan dropped interest rates to 1% end 2001 and kept them there for a few years – hardly surprising the a load of no so well off people decided the time was right to take the plunge. The interest rates shot up 5-fold in a few years to over 5%. Then a year or so later, the rates were reset causing big problems for people who did not earn much. This should play itself out by Sept 2008 according to our analysis. Meanwhile in the UK, interest rates never dropped below 3.5%, so when they rose to 5.75% there wasn’t the impact that the US rates had.


Also bear in mind in the UK the average gearing on property is only 30%. There is huge property wealth/equity which is not being used or pulled on. This hardly looks like a highly geared precarious position.


Anyway, we aren’t trying to talk the market up or down, we frankly hope the market keeps rising, but if it doesn’t we’re not going to loose any sleep either. It will be a good buying opportunity if prices dip and motivated sellers need some buyers to help take these properties off their hands. It’s difficult to find bargains at the moment, so a bit of market turmoil makes it easier to negotiate an attractive deal.


US Market

We see the US market being a lot more depressed than the UK market for the next 8 months. First of all a few positives and negatives:







Overall, we see continued negative emotion, dropping dollar and sliding real estate prices until Sept 2008, whence we expect a strong recovery. Yes, there may be a short mild recession, but the shot in the arm of massively lower interest rates, tax giveaway cheques and the end of higher resetting of mortgages in Sept 2008 should see the economy picking up sharply end 2008. Meanwhile, exports have been very strong which has helped jobs creation, so overall, we expect 2009 to be a good year for real estate in the USA. We’re probably the first people who have stuck their necks out and advertised this, but if you consider the combination of the stimuli and the election year – we’d be very surprised if the economy had not picked up by end 2008 and with it the real estate market.


And for anyone that does not think we are objective, please refer back to all our previous Special Report and house price predictions dating from early 2004. If you can see where we were wrong, please email us on We have a strong track record of predicted trends – this is one of our specialties – and we like to share this with all our visitors with the overall aim of improving your property investment returns. Have yourself some good investing. team

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