BRITAINS HOUSING BUBBLE Is British property ‘safe as houses’, or are we in another property bubble consisting of overvalued prices?
“What goes up, must come back down again” Sir Isaac Newton
Written by Michael Cosgrove on behalf of A.K Icarus LLP PUBLICATION DATE – December 2015.Researched and compiled from January 2015. ‘USER-FRIENDLY’
TABLE OF CONTENTS -BRITAINS HOUSING BUBBLE-
-INTRODUCTION -BUBBLE CHARACTERISTICS & CHECKLIST 1 - WHAT HAS CAUSED THIS BUBBLE?.....WHAT IF?, QUESTIONS 2 - PREVIOUS HOUSING BUBBLES 3 - IS HOUSING SAFE AMONGST THIS TURMOIL? 4 – SUPPLY & DEMAND FACTORS 5 - IS THIS A CONTROLLED MARKET? 6 - ENGLAND Vs LONDON 7 - RISKY BUSINESS 8 - COMPANIES & MARKET PLAYERS 9 – OUR POSITION 10 – WHAT NEXT? 11 – CONCLUSION
INTRODUCTION Here is our ‘USER-FRIENDLY’ presentation based on Britain’s current housing bubble. This presentation will reveal the fundamentals and economics behind the current bubble we are seeing in Britain’s property market today. This presentation is a result of research taken out with that being both qualative and quantitative based. The results has led us into ‘Shorting’ Britain’s property and mortgage sector over the forthcoming months with our view being that this bubble will burst over the next year or two. In Lehman’s terms, we are investing capital on the hope of the market and houses prices falling, basically we are speculating against the British property market and house prices.
We strongly believe that the UK housing and mortgage markets are in the same territory seen between 2004 and 2008, which came to an abrupt end with the global financial crisis of 2008. The last housing bubble we witnessed up until 2008 in Britain, burst due to the lack of credit available to ordinary citizens and institutions. After the 2001 terror attacks the global economy was flooded with cheap credit in order to fuel the economy, with British housing being a safe investment, a lot of this capital was filtered into the British housing market which then created a high demand for homes which was then followed by an increase in prices. When this credit supply was tightened due to the credit crunch of 2009, the demand for housing dropped and in return so did house prices. Those who did buy before 2006 saw a high increase in equity within their home, but those who brought after 2007 would have seen a decrease in equity within their home by 2009/2010. The research within this presentation will show why we are in the same territory seen pre-2008, what has fuelled this surge in prices and why this bubble is different from previous housing bubbles seen in Britain. I am in firm belief that the media,new government schemes, buyers confidence and house price’s increasing has attracted first-time buyers into the market just to keep the bull market flowing, yet this is leaving new buyers highly exposed to negative equity if this bubble does burst as well as exposure to an increase in interest rates.
-BUBBLE CHARACTERISTICS & CHECKLIST Many bubbles have been witnessed before in history and the main distinction between them all, is that they are normally confirmed by governments, mass media and banking industry after they burst. As we know, when it comes to financial advice, investing and home buying, the main entities the public people look towards is the government, media and banks. Below is a list of characteristics seen in past bubbles based within stocks, bonds and the property market.
New elements Rapid rise in prices High confidence for continuing price increase Macro Events Popular and high media interest Increased rate in lending and home loans Increased strength in state currency (GBP) Relaxed lending and housing policies High valuations compared to historic prices Large margins between regional prices New investors & entrepreneurs Continuing economic growth Decline in household savings Inflation rate at low levels for a long period Continuing decline in consumer price inflation CPI Index
We have ran a ‘checklist and research’ model which has combined all the above with the current status of the property market and we fully believe that the current property market within Britain is showing all signs and characteristics of a ‘Bubble’ behaviour.
1-WHAT HAS CAUSED THIS BUBBLE?
Interest Rates at an all-time low Increased supply of cheap mortgages and credit Immigration increase Britain and London being a ‘safe-haven’ for foreign investors Overall economic growth resulting in deposit availability for buyers Government schemes including ‘Right-to-buy’ & ‘Help-to-buy’ and more An increase in Britain’s and London’s global economic power
WHAT IF ?
Interest rates were to rise, would demand fall and would mortgage payback affordability be capable for buyers? A decrease in mortgage supply were to occur like 2009, would there be a fall in demand for housing? If immigration was capped or declined, would we see a fall in housing demand resulting in house prices falling? If the government brought in schemes to deter foreign investors, would we see a big wave of houses for sale hitting the market and would that deter foreign capital from entering the market? The economy was to slow down, would that affect buyers savings, their home deposits and repayments? These government schemes were to stop, would that create a decline for buyers in the market resulting in a decline of homes purchased? What if London’s financial power and attraction were to deteriorate, would that affect the supply of house buyers entering London?
2 - PREVIOUS HOUSING BUBBLES WE HAVE SEEN THIS BEFORE....HISTORY ‘DOES’ ALWAYS REPEAT ITSELF.
1978 to 1983 From 1978 to to 1980 real home prices rose from £60,000 to £80,000 a rough 33% increase in just 2 to 3 years. From 1980 to 1983 real home prices fell back down to £65,00 a rough 20% decrease in just 2 to 3 years.
1985 to 1995 From 1985 to to 1990 real home prices rose from £90,00 to £140,000 a rough 55% increase in just 5 years. From 1990 to 1995 real home prices fell back down to £85,000 a rough 40% decrease in just 5 years.
2000 to 2009 From 2000 to 2007 real home prices rose from £90,000 to £180,000 a rough 100% increase in 7 years. From 2007 to 2009 real home prices fell back down to £130,000 a rough 30% decrease in just 2 years.
Historically the average time for a property bubble to build and burst takes roughly 9.5 years which includes a rough 4 year bubble build up then followed by a 4 to 5 year price correction. Within the past 40 years we have witnessed 3 different property bubbles and we are possibly residing within the 4th bubble. But looking at the overall macro outcome, the upward trend in the property market since 1975 has been relatively high, this is a positive result. But underneath a major factor is occurring which is a fundamental within the property market and buyers, this factor is ‘average earnings’ to the ‘average house’ price. The upwards trend seen in housing since 1975 is high and positive but if we combine that trend with the ‘average earnings’ trend, a darker picture emerges.
ALTHOUGH HOUSE PRICES HAVE BEEN TRENDING UPWARDS SINCE THE 60S BUT THE AFFORDABILITY FOR BUYERS (ESPECIALLY FIRST TIME BUYERS) HAS BEEN TRENDING DOWNWARDS.
3 - IS HOUSING SO SAFE AMONGST THIS TURMOIL? -WHY IS HOUSING SAFE WHEN THESE AREAS ARE NOT?
Our welfare system is indebting our country as well as increasing our GDP Our healthcare system is nearly bankrupt Higher standards of living have increased Retail, technology and leisure industry are also showing signs of bubble behaviour Low fuel prices correlated with oil prices are at a 7 year low Record levels of household debt and increased volumes of debt problems Our steel industry is hanging of a cliff and in dire need of rescuing Increase in terrorist activities within the globe and especially within Europe Over 17.5 million brits have gone into debt to fulfil Christmas 2015 Un-certainty over Britain’s place within the European Union and Brexit
After looking at the above and the other areas which are a concern within Britain at present, one tends to feel that housing is not a safe investment at this current time. All of the above including terrorism, welfare, standards of living to the EU and even household debt, all have a connection with housing and this connection (being strong) leads me to the conclusion that housing is not just a risky investment, it is also a systemic risk to Britain.
HOUSEHOLD SAVINGS RATIO CHART – 1997 to 2015 (Source – ONS office for national statistics)
The chart above shows that in the past 5 years household savings has declined by roughly 50% but home prices has increased. This means the increase in home prices is fuelled by debt.
4 – SUPPLY & DEMAND FACTORS
Britain is currently seeing a housing shortage due to the amount of homes built per year have been declining for the past 10 years. The media and journalists have stated this shortage has caused a ‘housing crisis’ in Britain. Yes it has but the major underlying crisis is not that people cannot get homes, it’s that people are buying ‘over-valued’ homes due to this shortage mechanism. If this shortage did not occur then the supply of homes would have been higher than the supply of homes we are currently seeing , resulting in prices would not have risen as quickly as we have seen. This is a basic ‘Supply & Demand’ formula within economics. This exact same supply and demand theory is what caused the ‘Tulipmania’ bubble during the mid 1600’s aswell as other historic housing bubbles. If the government would have allowed more homes to be built then we would be seeing more available homes that are affordable to buy plus more jobs would have been created within this sector aswell as the current ‘illegal’ sub-letting market we are seeing would not be as thriving as it currently is. This has left the government in a stale-mate situation because if the supply of homes built were to increase, that would make current home prices decline through basic supply and demand factors. IF we keep building the same amount of homes or less, then this would be fuelling the current bubble and increasing the chance of major systemic risk when it does burst.
It is estimated that Britain needs roughly 250,000 new homes built per year to cater for growing demand. Below is a rough figure of new homes built per year going back to 2006.
YEAR 2006 - 170,000 NEW HOMES BUILT YEAR 2007 - 160,000 NEW HOMES BUILT YEAR 2008 – 130,000 NEW HOMES BUILT YEAR 2009 – 115,000 NEW HOMES BUILT YEAR 2010 – 110,000 NEW HOMES BUILT YEAR 2011 – 115,000 NEW HOMES BUILT YEAR 2012 – 115,000 NEW HOMES BUILT YEAR 2013 – 115,000 NEW HOMES BUILT YEAR 2014 – 140,000 NEW HOMES BUILT
5 - IS THIS A CONTROLLED MARKET? IS HOUSING A PART CONTROLLED MARKET? Below shows a chart that displays what is correlated with house prices. What is noticeable is that 6 main economic factors contribute towards the momentum in home prices and all 6 of these are majorly dictated by 2 entities both being the government and monetary system (bank of England). So yes, i strongly believe that house prices are mainly dictated by the decisions and actions taken out by our government and the bank of England. Government schemes have no doubt pushed up recent prices, The bank of England’s interest rate decision has allowed access to cheap capital by banks and the public, the government’s decision to allow Britain to be a safe-haven has introduced new foreign capital into Britain. These are all perfect examples of why i believe housing is a partial controlled market. I do not believe housing is controlled for the advantage of institutions or certain individuals but i do believe it is controlled for the good & economic growth of Britain. Those who buy houses upon the fundamentals, not the bandwagon, are those who will gain the most equity upon their asset. CREDIT AVAILABILITY
FOREIGN INVESTORS
ECONOMIC GROWTH
INTEREST RATES
IMMIGRATION
GOVERNMENT SCHEMES
HOUSE PRICES
6 - ENGLAND Vs LONDON ‘’The average London house is nearly half a million quid’’
Regarding house prices in Britain there is a major demographic segregation of price margin between England and London. According to the land registry of house prices released in October 2015, the average house price in London is £503,431 and the average house price across England & Wales is £186,350. So the average London house is worth 270% more than the average house in England & Wales, London is valued at 2.7 times more than anywhere else in England. Yes, London does have its thriving economy compared to the rest of England but this demand to reside within this thriving economy has created a bigger bubble for London’s house prices compared to the rest of England. In the North East the average house price is at £100,393, Wales being £121,854 and East Midlands being £137,823. In all aspect, it is clear that there is a major segregation from London prices to the rest of England which has led us into focusing on property companies and funds serving the London market or has a high exposure to London properties. We are also focusing on credit and mortgage companies that have exposure to credit and loans with London backed property and their sales volumes going back 20 years. Another area we are looking at is construction and development companies that are based in, or provide work towards the London and surrounding areas. London has been pricing itself out of the market because the average Londoner would need a £50,000 deposit and be willing to pay back around £800,000 to £1,000,000 over a 25 year process. In regards of repayments, these are kind of hard numbers to get to realistic with when the UK average household debt (excluding mortgages) is stood at around £6,500 from mid 2015. An increase in foreign and landlord buyers has helped out-weigh a decline in prices within London, it has resulted in the contrary being prices have increased alongside renting volumes, and emerged from this is a thriving legal & illegal sub-letting market. Even analyst Robin Hardy quoted ‘’London’s property market has become the ‘Swiss bank account’ of the 21st century’’. I totally agree.
In Westminster, Chelsea and Kensington alone, those homes are worth around 230 Billion pounds. Those homes alone are worth more than the whole of South Africa’s entire economy.
The average London home is around £500,000 and the average London wage is between £30,000 and £35,000. The average London home compared to the average London wage is roughly 15 times more.
7 - RISKY BUSINESS As i have mentioned, interest rates being low has produced an increase in home loan borrowing. There will be various types of mortgages that a buyer can take on and every mortgage will be correlated with interest rates set by The Bank of England and lending institutions. The main differences these mortgages can have is one is set at a fixed rate and the other is set at an adjustable rate. There can be 100’s of different types of mortgage products available but they all come down to two concepts both being ‘fixed’ or ‘adjusted’. The difference between them is the adjusted rate mortgage (or whatever fancy name the lender gives it) is correlated with interest rates, a fixed rate mortgage is set at the given interest rate (normally upon date of agreement). So those who take on adjusted rate mortgages are at risk of future interest rates rising which then will produce higher repayments which then can lead to financial difficulties and even repossession. Throughout 2015 there has been various media and news articles stating that millions of British homes will face financial difficulty if rates were to rise and even Mark Carney the governor of The Bank of England addressed households saying they should prepare for a possible rise in interest rates during 2016.
IF YOUR MORTGAGE IS OVER 4.5 TIMES THE SIZE OF YOUR SALARY, THEN YOUR MORTGAGE IS CLASSED AS A ‘RISKY’ MORTGAGE BY THE BANK OF ENGLAND. DURING 2010 AND 2015 325,636 MORTGAGES WERE TAKEN OUT AND DEEMED ‘RISKY’ BY THE BANK OF ENGLAND.THESE MORTAGES WERE 4.5 TIMES +, THE BUYERS AVG SALARY. THE AMOUNT OF ‘RISKY’ MORTGAGES TAKEN OUT DURING 2015 IS 64% HIGHER THAN THE AMOUNT OF ‘RISKY’ MORTGAGES TAKEN OUT IN 2010. £21.9 BILLION WAS BORROWED FOR MORTGAGES DURING OCTOBER 2015 AND THE COUNCIL OF MORTGAGE LENDERS ESTIMATES MORTGAGE LENDING TO REACH £214 BILLION FOR 2015. TYPICAL SIGNS OF DESPERATION ARE BEING SEEN. WHEN THE GOVERNMENT OFFERS A HOME BUYER (WHICH ALSO A TAXPAYER) MONEY TO GET ONTO THE PROPERTY MARKET THEN ALARM BELLS RING. WHEN THE TAXPAYERS MONEY GOES BACK TO THE TAXPAYER IN ORDER TO KEEP THE PROPERTY MARKET AFLOAT, ONE TENDS TO FEEL THE MUSIC IS STARTING TO SLOW DOWN. BETWEEN 2010 AND 2014, RISKY MORTGAGES INCREASED ‘YEAR-ON-YEAR’ BY AN AVERAGE OF 14.12%. FROM 2010 TO 2014, RISKY MORTGAGES INCREASED 64.4%.
8 - COMPANIES AND MARKET PLAYERS ‘’PROPERTY RELATED SHARE PRICES HAVE OUTPERFORMED PROPERTY PRICES UP TO 500% IN SOME CASES’’ The average property price was roughly £160,000 in 2009 and 6 years later, the average property price is £186,350, a 16.4% increase. We have monitored 10 property market related companies that are public and the average share price of these 10 companies has increased nearly 500% from 2009 to 2015. Disregarding leverage, these 10 companies increase in share price on an average has outperformed the average property price increase, by a stunning 29.4 times. A £10,000 investment in shares across these 10 companies in 2009 would be valued at around £60,000 august 2015 and that doesn’t include dividends paid.
2009 COMPANY
SAVILLS RIGHTMOVE BARRATS DEVELOPMENTS FOXTONS - 2013 LSL PROPERTY SERVICES TAYLOR WIMPEYZOOPLA BELLWAY BOVIS HOMES CAPITAL - 2010 COUNTIES
SHARE PRICE
2015
COMPANY SHARE VALUE PRICE
COMPANY PERCENTAGE VALUE CHANGE
£2.30 £1.60 £0.80
£305M £154M £796M
£9.80 £37.60 £6.53
£1.3B £3.4B £5.8B
+326% +2,250% +716%
£2.60 £0.50
£733M £52M
£2.30 £3.50
£650M £364M
-11% +600%
£0.40 £2.30 £6.00 £4.20 £1.25
£1.3B £961M £725M £564M £1.1B
£1.90 £2.50 £24.00 £11.00 £4.50
£6.3B £1B £2.9B £1.6B £3.65B
+375% +8% +300% +162% +260%
£6.6B Total Mkt Cap
£26.9B Total Mkt Cap
+498.6% Avg Mean Increase
NOTE – Share prices are quoted from jan 1st 2009 and throughout August 2015.Unless stated due to IPO occurring after jan 1st 2009.
9 – OUR POSITION ‘’HOW WE ARE PLAYING THIS MARKET’’ Based upon the fundamentals, factors and research taken out, this has led us to not only write this presentation, but to also profit from the forthcoming potential correction of this market. Negative may it be for us, the economy, and homeowners, but hopefully this presentation can be used as an ‘awareness’ approach to current and potential new home buyers. Here is our approach in order to profit from this correction, the positions we are currently constructing are based within a ‘Long/Short’ portfolio aimed at this market sector. TRADE CONSTRUCTION PERIOD – 12 months (Jan 16 – Dec 16/July 16 positions booked) We will be using a ‘hedged’ strategy which means we go long and short on 2 property market related companies that have trading trends correlated with each other. This allows us to take on no losses if the property market keeps increasing but still have a short position exposure. Once the trigger does come in play and the nationwide downtrend does occur, we will then convert all of our long positions to short positions. Below shows our short positions and their ‘hedged’ long positions. We have diversified across many companies including mortgages, construction, home goods, services and property investments funds and trusts.
LONG* PERSIMMON PLC :PSN CARRILION PLC :CLLN FOXTONS GROUP :FOXT TYMAN GROUP :TYMN KINGFISHER PLC :KGF BARCLAYS PLC :BARC SAVILLS PLS :SVS LSL PROPERTY PLC :LSL BELLWAY PLC :BWY UNITE GROUP PLC :UTG CLS HOLDINGS PLC :CLI
SHORT BARRATT DEVELOPMENTS :BDEV BERKELEY GROUP HOLDINGS :BKG ZOOPLA PROPERTY GROUP PLC :ZPLA BOVIS HOMES GROUP :BVS HOME RETAIL GROUP :HOME LLOYDS BANKING GROUP :LLOY RIGHTMOVE PLC :RMV COUNTRYWIDE :CWD MARSHALLS :MSLH GRAINGER PLC :GRI DAEJAN HOLDINGS PLC :DJAN
(LONG EXPOSURE – SHORT EXPOSURE) / CAPITAL INVESTED X 100 = 0% Market Exposure -Our long & short exposure amount will be the exact same figure so we will always have a 0% market exposure as shown above.
*CONVERTED INTO SHORT POSITIONS WHEN TRIGGER DOES OCCUR.
10 – WHAT NEXT? After reading this, our position, and the potential risks the property market is holding, we have compiled below a few bullet points that show what areas we are looking at which will possibly ‘trigger’ this market to crash. These same areas have also been the trigger for historic bubbles to burst but in this modern day and age where capitalism is global and more informative than ever before, these triggers can be international as well as national.
BRITAINS IMMIGRATION SLOWING DOWN (POSSIBLE BREXIT) HIGH RISE IN INTEREST RATES STOCK MARKET CRASH DECREASE IN GOVERNMENT SCHEMES HELPING THE PROPERTY MARKET INCREASE IN GOVERNMENT SCHEMES AND RATES, NOT HELPING THE PROPERTY MARKET RAPID INCREASE IN CHINAS ECONOMIC SLOWDOWN A DECLINE IN THE SUPPLY OF CREDIT AND MORTGAGES BUYING CONFIDENCE DECLINES A RISE IN UNEMPLOYMENT FIGURES NEGATIVE VIEW UPON THE MARKET FROM MEDIA AND JOURNALISTS FIRST TIME AFFORDABILITY DECLINING A INCREASED SUPPLY OF NEW HOMES TO BE BUILT NEW REGULATIONS AND RUKLES COMING IN PLAY
All of the events above and the effects they can produce, all have a connection towards the property market. We are currently seeing some of these playing out as we speak. First time affordability to buy has been declining, Chinas market has seen a crash and much volatility during 2015, even articles released and hedge funds have stated publicly that the property market is in a bubble. The main events that will trigger this market to crash will be mortgages, unemployment figures, interest rates and a possible Brexit. Keeping an eye on all the above events and the market during 2016, it will be very interesting to see how this market unravels and what will contribute towards this to happen.
11 –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
-WHEN HOME PRICES ARE FALLING, THAT CREATES A ‘BEST-BUY’ OPPURTUNITY. -EASY MORTGAGES AND CREDIT TEND TO BE OFFERED WHEN HOME PRICES ARE VERY HIGH. REMEMBER THE BEST TIME TO BUY IS WHEN PRICES ARE VERY LOW. -LOOK AT HISTORIC HOUSE PRICES.(REGIONAL AND NATIONWIDE) -ALWAYS STAY WITH ‘FIXED RATE’ INTEREST RATES AND TRY TO OBTAIN A ‘NO OBLIGATION’ OPTION TO TRANSFER. -BUY LOW AND SELL HIGH. NOT, BUY HIGH AND SELL LOW. -TRY TO KEEP YOUR HOME VALUE NO HIGHER THAN 4 TIMES YOUR SALARY. REMEMBER A HOUSE VALUED AT 4.5 TIMES YOUR SALARY OR ABOVE, IS DEEMED AS A RISKY LOAN. -ALWAYS TRY TO PAY 10% OR MORE AS A DEPOSIT. THE MORE THE DEPOSIT MEANS THE LESS RISK YOU HAVE OF ENTERING ‘NEGATIVE EQUITY’ -ALWAYS GET THIRD-PARTY ADVICE. A MAJORITY OF BANKS, MORTGAGE BROKERS AND AGENTS TEND TO LOOK AT THEIR COMMISSION ‘NOT’ YOUR LONG TERM FINANCIAL STATUS.