Thursday, January 04, 2007

"uk bubble watch / pimco"

you know what time it is when they compare a situation with tokyo/japan back in the bubble days....... to read more on the uk and london click on the labels and scroll down to the 2nd. entry

wenn immer der vergleich mit tokyo und japan zu hochzeiten gezogen wird ist gefahr im verzug.......mehr zu uk und london unter den labels. bitte dann bis zum 2. beitrag scrollen

......Looking at 2007 and beyond, there is no question that parts of the U.K. property market bear the hallmarks of the Winner’s Curse phase. Three aspects in particular seem to stand out as symptoms of the curse.
Firstly, affordability is declining fast, particularly for first time buyers.
Secondly, buy-to-let schemes, which have been increasing in importance, are now facing negative cash flows.
Finally, the valuations in areas of London are truly out of sync with economic reality.

Affordability has been declining for a while, but the trends of the last three months have exacerbated the problem. At an overall level, the house price to earnings ratio is running just under six times, compared to a ratio of three times in 1993 when the rally started. The fact that this level of valuations has not been seen for a very long time does not seem to worry the pundits because they argue that interest rates on a nominal and real basis have returned to very low levels. This is indeed true, and without any doubt, declining real yields have been a key factor behind this extraordinary rally. The day in May 1997 when Chancellor Gordon Brown made the MPC independent was indeed a great day for homeowners in the U.K., but you cannot live off that forever.
Following the recent hikes in the base rate, a new borrower will on average spend 45% of take-home pay putting a roof over his head.1 Simulations done by Capital Economics, a consultancy group headed by Roger Bootle, suggest that a move by the MPC to 5.5% combined with an appreciation by just 8% year-over-year would push this figure to well above 50%. The 30-year average is around 37%. The real problem of affordability appears clearer, though, when you look at first time buyers. Initial mortgage payments for a first time buyer amount on average to a whopping 120% of take home pay.1 This level has not been seen since the last ‘curse phase’ in 1991 and indicates that you now need 60% of both salaries for a newly wed couple to afford a dwelling. Not surprisingly, first time buyers as a proportion of new home sales represent just over 10% of overall turnover compared to a peak of 30% in 1993 when the rally started. I might be somewhat simplistic in my views, but it is difficult to see how a real estate rally can be sustained if first time buyers cannot afford to buy a house at the peak of the economic cycle.

The buying so far in this cycle has been led by the ‘buy-to-let’ brigade. The data speak louder than words. Mortgage approvals accounted for by the Bank of England have increased from a low in early 2005 of just under 80,000 per month to a current level of 130,000 per month. This figure includes buy-to-let schemes. If, however, you take out the buy-to-let transactions, as per the data published by the Council of Mortgage Lenders, the rise in approvals as seen in the chart below looks a lot less impressive at around 80,000 per month.
At the moment, the buy-to-let market is nicely supported by the wave of new immigrants, which has beefed up the numbers looking for rentals. At the margin, however, the business underpinnings of this activity are starting to look more fragile. Capital Economics suggests that landlords can expect gross yields of 3.9% in 2006-2007, but can expect running losses in 2008. At a gross yield of 3.9% anybody with a mortgage greater than about 70% would in fact already be losing money. A study conducted by Keefe, Bruyette, Woods Ltd. suggests that the marginal investor who is exposed to just one property and has borrowed 85% of the property value would already have a negative cash flow of around £1,000 per annum. While most reports are pretty bullish about the outlook for the buy-to-let activity, the data would suggest pretty clearly that the logic of getting into this activity is entirely related to the expected appreciation. This would be pretty symptomatic of the Winner’s Curse rather than of a healthy real estate market about to make multi-year price increases. also on the rentyields
The final aspect of the U.K. real estate market that seems to bear the hallmarks of the Winner’s Curse is London property prices. Estate agents qualify recent activity as a ‘frenzy’ and the current level of prices appears to justify their characterization. The table below, sourced from global property specialist Knight Frank, gives some indication of the relative insanity of London prices relative to the rest of the world
The figures come with huge disclaimers and refer to small samples of top-end properties that might create an upward bias in the average number. The point still holds, however, that London is rapidly getting to levels where the best comparison seems to be Tokyo in the heydays of the late 1980s. At that point, the Japanese model looked rock solid and nobody questioned the logic of real estate prices because that was the place where the business was happening. ....

Once the frenzy is over, ...... What then? With household debt at all time highs, real disposable income hardly growing, sterling close to the $2 level and the government out of firing power on the spending side, the only option is likely to be a reversal of monetary policy. Watch out - the next 18 months could be a roller coaster ride! .....

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