Dan Denning of Moneyweek,on the back of Fred Harrison's 18-year cycle is claiming that UK house prices will boom for the next ten years and now's the time to get into property etc etc.
However, whilst the 18-year cycle seems to be an established fact, it is also a fact that interest rates are at a multi-century low, so, without a corresponding boom in average earnings, where is the money going to come from to fund this ten-year bull market in land? At the start of the previous bull market in land in 1993, average household debt was only just above 100% of income and it increased in line with the land price boom. Now we are starting from 135%, so if the boom is to be financed by increased debt, we will end up with average debt at nearly twice income, just before a crash.
If Dan Denning's right, I think I'll leave the country before 2026.
Tuesday, 15 November 2016
Boom not bust
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13 comments:
Inheritance (and continued lower transaction levels) will play a significant role in maintaining the strength of UK property values. Hundreds of thousands of under 30's are set to inherit property wealth of five or six figures from their parents or grandparents.
Take a £100,000 deposit, duel income mortgages, 40 years terms as standard, interest rates remaining ultra low, and higher than average earners dominating purchases, house prices can easily be established at 8x or higher UK average salary.
1. Deposit requirements will get more and more relaxed for more and more products.
2. The government will increasingly 'incentivise' purchases.
3. Peer2Peer lending will make inroads into the mortgage market.
4. Ultimately 'self-cert' mortgages will be back, but they won't be from 'banks'. The FCA may clear them or they may simply be offered from overseas jurisdictions that do not need FCA approval.
5. Shared ownership / shared appreciation mortgages will feature at the top of the cycle (as they always do).
While nobody can say with 100% certainty there will be an '18 year cycle' type pattern and another 8 to 10 years of house price growth, it looks as good a bet as any to me. Especially as a lot of related companies are yielding 8% to 12% gross.
My SIPP is heavily skewed in this direction. 7 of my 16 positions and around 45% of my holdings are in UK land/lending equities - Virgin Money, Paragon Group of Companies, Mortgage Advice Bureau, Inland Homes, Telford Homes, British Land and Safestay.
While safestay will probably get dumped if it falls below 35p, I intend to hang onto the rest of them until mid 2020's and I reckon they can all yield double including income.
"interest rates remaining ultra low,"
That's quite an assumption.
"higher than average earners dominating purchases"
That implies a shrinking of the size of the buyers' market. House (land) prices rise when there is more money available to buy, not the same money concentrated in fewer hands.
SL, I think the mistake Dan Denning is making is not that there won't be an 18 year cycle, but in implying too exact a fit. 18 years is an average, with highs as high as 48 and lows as low as 6. Even going by the most recent iterations of the cycle, you can see that there is a good two to three years of drift either side of the main peaks and troughs and even more variation in their magnitude.
So we could be looking at a severe mid-term wobble, dropping us back to the bottom of 2010, followed by a climb to a muted peak that is barely more than what we have now in real terms and this would still fit in with the overall pattern.
I agree with TB's second para and SL's list. And there are plenty of things which the UK govt is doing that it could do even more to give the next bubble an extra push.
But the 18 cycle is just one of those fixed things, the only thing which interrupts it is a world war, it does not vary between 6 and 48, it varies between 16 and 20.
Also, the 18 cycle does not mean that the peak at the top of each peak is higher than the top of the previous peak. Sooner or later the amazing rate of land price inflation we had the last 20 years in the UK will have to slow down to be just slightly more than earnings growth (assuming interest rates remain very low). This amazing inflation was not just the 18 year cycle, it was the last vestiges of Georgism Lite being purged from the system.
"higher than average earners dominating purchases"
That implies a shrinking of the size of the buyers' market. House (land) prices rise when there is more money available to buy, not the same money concentrated in fewer hands.
No, TB might be right on this. If people on lower incomes are permanently renting and rented homes are not sold as often as owner-ocucpied, then clearly average prices paid for those that are bought and sold will go up. If rented homes change hands more often than owner-occupied ones, average price paid will go down.
@ TB, your first para is probably not true and does not really make sense.
Nobody is taking any notice of the panic among Conservatives.The Sun had this headline on Nov 4 "Housing crisis leaves door open for Corby premiership"
"If house prices keep rising homeownership will fall further and for the Conservative Party, with its base in homeownership, that's disastrous" says Alex Morton, who was Cameron's housing expert at the Downing Street policy unit.
Sayid Javid - the new Communities Secretary - last month used his speech at Conservative Conference to accuse the UK's large house builders of restricting supply to boost prices and therefore profits.
The big developers have a stranglehold on supply said Javid and are sitting on land banks while delaying build out.The government is set to publish a White Paper on Housing next month with fines on building delays being touted and developers possibly being charged council tax on unbuilt houses after a certain period"
All above summarised from Liam Halligan's blog -googleable as Liam Halligan Sayid Javid the Sun- which regrettably these days is more on the ball than this blog which is too often down with the Beleavers on the beach worshipping the Brexit Cargo Cult.
So we could be looking at a severe mid-term wobble, dropping us back to the bottom of 2010
In parts of the UK prices haven't really recovered from 2009/10. Whereas up herein Aberdeen the GFC coincided with a massive rise in the price of oil. House prices up here kept racing on. At $40-50 / barrel rents and prices are falling and there are hundreds of even thousands of brand new estate recently or nearing completed. The housebuilders/landbankers are remarkably quiet about their vast Aberdeen estates in their annual reports, but I know discounts of 20% over previous actual sale prices are being offered in some cases already.
I reckon we're defo in a 4 or so year period now where a mid cycle wobble is likely, and it might even be happening now in London. To me, this is the period to be buying those equities which will benefit from the next up phase. To most voters 'the economy' and 'house prices' are the same thing. The government will stop at nothing to keep it going.
"But the 18 cycle is just one of those fixed things, the only thing which interrupts it is a world war, it does not vary between 6 and 48, it varies between 16 and 20"
My source: http://www.extension.harvard.edu/sites/extension.harvard.edu/files/foldvary-data.jpg
"No, TB might be right on this."
Having looked at it again, I would agree. I am confusing price with value. Average prices paid will go up, average value of the housing stock won't.
SL, please keep an eye on Aberdeen's tiger towns. I would be interested to know if houses are being sold at a discount, or whether they will simply stand empty, like they did in Ireland. It's a pity that local incomes have gone down as the micro effect of lots of new supply will be blurred with the effect of a fall in incomes.
I'll try to do some research on them, take some photos, then do a post or two on them. Tiger towns isn't a phrase I've hear yet though.
DBC, good one, I have posted.
B, FF's table exactly illustrates what I said. All the cycles are all 16 - 18 years, withe the exception of 1925 - 1973 which was interrupted by a world war and post-war Georgism Lite.
For some reason he split 1973 - 1989 into a 6 and a 10. Really it's a 16.
SL, "Tiger towns" is an Irish expression.
M, fair enough, but when you are making a buy/sell decision, four years' leeway is still quite a lot to deal with.
"In parts of the UK prices haven't really recovered from 2009/10."
So statements like this, also from Mr Denning, "But the “Grand Cycle” he’s working off... suggests that the second half of the 18-year real estate cycle will be even more powerful than the first." don't quite have the impact he hoped. Anything is bigger than nothing.
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