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Rescooped by Desiree Jarek from The Property Voice!

The Myth of Housing Prices

The Myth of Housing Prices | international real estate opportunities |
Few other subjects engender debate as house prices, being typically divided along the lines of homeowner and prospective homeowner. However, post 2007/2008, there is a greater appreciation that the current economic model is flawed and that house price inflation in particular is not the route to wealth and prosperity that is promised. The following discussion goes beyond the repeated sound bites that accompany any discussion on the housing market to explain how the current situation has developed, its consequences and, most importantly, how the principle of homeownership could be redefined to deliver far-reaching economic and social benefits.

Via Richard W J Brown
Richard W J Brown's curator insight, July 9, 2014 3:05 PM

Warning: if you are a property investor you may not like what you are about to read, certainly not in the associated linked article and possibly in my own commentary either.


Let's just say that those at Renegade Economist (RE) are not really likely to be all pally-pally with us property investor types and vice-versa. So, the question then is: why I am sharing and possibly by doing so even promoting their ideology then?


The answer: to open our minds to what could happen if certain forces were to influence politicians to look at housing policies differently. This then allows us to make contingency plans for the future; or as I like to call it the play the 'what-if game'.


If you don't want to get too upset then I suggest you either scroll down to the sub-heading in the associated article called 'reforming the housing market' but if you want to know why these reforms are suggested by RE and don't mind getting upset then feel free to read the lot.  In any event, here is a brief summary of RE's proposals:


1. Capital gains tax to be applied to all residential property sales based on inflation-adjusted value, regardless of being a main or secondary home - or in other words capital gains tax to be paid by all homeowners on gains above inflation.


2. Mortgages to be restricted to a max of three times single income or four and half times joint income, with a max 90% LTV ratio - or a mortgage lending cap or credit squeeze based on income and LTV


3. No tax deductions for interest payments on borrowings for buy-to-let mortgages and LTV ratios limited to 50% or less - or increasing tax on landlords and limiting their borrowing capabilities at the same time


4. Overseas funded residential property purchases should incur capital gains tax and face punitive stamp duty charges - or further disincentivising foreign property ownership


5. Banks to be regulated to maintain higher capital requirements against mortgage lending - or limiting banks' capability (or appetite) to lend against property


Ok, so now...let's play the 'what-if game' then...what if some of these changes became Government policy and law?


Starting with the CGT proposal - if all homeowners were hit with CGT what would happen?


The proposal actually allows a grace period before it becomes binding and so the actual impact will be a massive surge in properties coming onto the market for sale before the end of the grace period - mostly higher value properties where the owners want to cash in their chips before being hit with a tax charge that didn't exist before. Ergo, increase in supply and fall in prices. Human nature would probably suggest that the herd would follow this pattern unless of course the plan is to retain the property and take our chances with inheritance tax instead. The result however would most likely be a sudden fall in property prices.


What about lending restrictions then?


We have already started to see some aspects of this coming into play now following the mortgage market review (MMR) and the recent caps on lending set by the Bank of England. If this is extended then it will reduce the numbers of people looking to enter into high-debt to income borrowing to fund house purchases and so should dampen demand to expensive property in particular. This reduced demand could contribute to falling house prices (the intention) therefore.


No tax relief on interest payments and limits on BTL LTVs.


I have previously commented on this aspect and those with a higher, yet not necessarily stupidly so, LTV mortgage would find the removal of this tax relief to be very painful indeed as it would result in tax being paid on gross rent less only some small allowable deductions for tax purposes, possibly repairs, letting fees and insurance say. The net result would be a significant erosion of net rental income to landlords probably to the point of what is termed ‘negative gearing’ in Australia or dipping into our pockets to support the monthly running costs of owning a BTL with a mortgage. The result of a 50% LTV cap on lending would of course reduce the capability of many investors to acquire property, or at least higher value property than is the case today…another demand dampener.


Limits and penalties on overseas investors


As is already the case following the introduction of CGT on all property sale gains for overseas owned properties in the last budget we have to imagine that this would further reduce demand and thus prices…probably most notably in London.


Increase capital requirements on bank lending on property


This would probably start to restrict such lending being as readily available as it is today – a kind of credit squeeze if you like. This again would soften demand and reduce prices.


So there we have the excellent news! What you gonna do about it then? If we see it coming we may behave differently to if we don’t…let’s hope that we DO see it coming though, as if we don’t we are probably going to be extinct pretty quick I would say. We are likely to become lame ducks with negative cashflow, negative equity and no real lending solutions if these changes come to fruition…possibly the intention.


So, here are some possible alternatives we could adopt:


Dump our assets (properties) before the surge

Pay down our debt to limit our exposure to price falls and tax restrictions

Reduce our investment in the BTL sector and seek other assets to invest in, such as shares, bonds and gilts

Seek out other property markets to invest in (probably overseas)

Hike up rents…if we can


There may well be others but these are my top of mind thoughts here and now at least.


OK, so let’s play some of these scenarios through a little shall we…


If we try to dump our assets we will trigger the stampede anyway and end up flooding the market with properties probably causing a house price crash in any event. Maybe the Wilsons have seen this coming?


If we choose to pay down our debt levels, we may be able to ride out the storm but would it be worth doing that if the result was say a 30% to 40% write down in the value of our asset at the same time?


We could try to exit (see point 1) and invest in other assets instead, or we could divert planned investment to do the same. I could argue that share dividends, bond returns and the like still fall under the general banner of ‘unearned income’ that seems to be so disliked by the RE in the first place, so watch out if you do is all I say, as once the snowball starts off down the hill who knows when it might stop.


We could look to invest in other property markets instead…say the US for example…the land of free enterprise and all.


I doubt that we will be able to artificially lift rents due to our increased costs but hey it could be worth a go I suppose.


I guess if I was of the belief that such policies were heading our way then I might be inclined to cash in and get out looking to invest in other markets instead.  And where do you think that would leave the UK housing market and wider economy if others were to adopt the same approach do you think?


Lots of current inward investment redirected overseas instead

A reduction in the number of houses available to rent in the private rental sector

A reduction in general investment into rental properties

Potential financial ruin to a multitude of people that are seeking to supplement poor pensions, low savings returns and such like

Erosion of personal / family wealth of around 65% to 70% of the households that are also homeowners

Reduced tax receipts

Reduction in the UK’s GDP and asset values and the wider impact this would have on borrowing costs, tax receipts and such like

Another banking crisis as house values fall below acceptable lending levels




So, let’s just hope that those responsible for making our laws and policies are decent chess players and can think a few moves ahead…for all our sakes…otherwise watch out for the law of unintended consequences once again.


As for me, I am already starting to make provisions for some element of tightening up in the UK private rental sector…how about you…


What if?

Richard W J Brown's comment, July 9, 2014 4:00 PM
No problem Desiree :)
Richard W J Brown's comment, July 10, 2014 7:09 AM
Desiree - thx for the shares...what specifically triggered them if I may ask?

New homes get smaller but affordable: Cushman & Wakefield ...

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Via Bhavik Chitalia
Bhavik Chitalia's curator insight, July 9, 2014 2:40 AM

 The reduced apartment sizes in new launches in 2014 have contributed to making prices more affordable.