April 24

Why I’m Extremely Bearish on UK property right now…


Seeing loads of people in the UK property space saying that this is the bottom for UK residential property, there’s no more stock market crashing to come and that you need to BUY BUY BUY! ?‍♂?‍♀

I have no agenda or conflict of interest here as it doesn’t affect me at all whether you do/don’t buy a house or agree/disagree with this, but if my experience/knowledge has any weight with you, I urge you NOT to buy residential property if you’re doing it for investment purposes. Same for stocks, it doesn’t affect me whether stocks go up or down. So this really is a no-agenda stance for me here. I have no property course to sell you. I just want to be your dose of realism in this hypey-emotionally-charged topic as UK citizens seem to be born with the idea that property always goes up! (Which it doesn’t. Twas flat from 1845 to 1965ish).

Also before I start, if you just want to buy a house to live in and aren’t fussed about going into negative equity then sure, crack on.

So, these ‘BUY BUY BUY’ people are suffering from:

 Conflicting interests. Their living may be from property training or they may be mortgage advisors or estate agents etc so they stand to lose income if people don’t buy.

 Probably suffering from Dunning-Krueger effect where they have little knowledge of the markets but high confidence in thinking that they do. Perhaps maybe because they’ve done well over the last 10 years in property but are unaware of larger macro-economic cycles and trends.

 They have a terribly thin understanding of global macro-economics and have no idea what’s actually happening behind the scenes right now.

Other posts I’ve done explain why we have MUCH more stock market falling to come. But here is why UK residential property has more falling to come:

1.) Bit of background info. The predominant reason why we’ve had a booming housing market since 2009 is mainly due to ridiculous currency supply expansion as Central Banks tried to ‘print’ their way out of the sub-prime mortgage collapse. That credit flowed into the banking and property market. It created artificial stock market rallying which made people feel happy, construction firms got lots of credit and it started lots of building. There was also a converging of Millennials entering the period of their demographic spending wave where they were buying their first homes. So there was actually an increase in demand. Combined with the glut of cheap credit in the banking sector and big builders simply exacerbated this demand, they were offering lots of fancy mortgages and developers had the time of their lives.

2.) It’s fundamentally pivotal that you understand what makes UK house prices go up and down. And it’s NOT by the conventional thought of Demand vs Supply. There have been many times in history throughout the world where there’s been a massive lack of supply and house prices still crash. And in the UK right now there’s actually a lack of supply. Some reports say up to 3-5m houses need building. So many people have read headlines like this and then quickly developed an uninformed opinion that property can only go up. Wrong. The single main reason why house prices go up here (and the US) is due to mortgage-issuance!

a.) People get approved for mortgages and so they go and ‘buy’ a house. (Side note, I always cringe when people say they’ve bought a house. They haven’t. It’s the lender’s house and it isn’t theirs until they’re mortgage-free. Which rarely ever happens. You’re just a debt-slave until you pay it off). The more people that are issued a mortgage and this ‘buying’ cadence maintains or increases, then house prices go up. (Over 73% of house ‘purchases’ are done via mortgages). But it’s a self-licking lolly because the more mortgages issued = rising house prices = the more ‘equity’ the banks have, so they can lend more and also more developers can get access to more funding to build more houses etc.

b.) But then final macrocycles eventually kick in and catch up. Eventually, you get into the situation where lenders struggle to find suitable borrowers, they then may soften criteria and may even give 100% mortgages etc, but eventually, mortgage issuance decreases and therefore house ‘purchases’ decrease and so house prices slide. OR you get into the situation where something happens in the credit markets and so lenders abruptly stop lending. OR you get into the situation where the finances of the masses get clobbered and so people just stop buying/up levelling their homes and hunker down.

Well, what’s happening now is all of those situations. And what we’ve seen so far is simply the hors d’oeuvre of what’s inbound.

So if I’ve confused you so far, all you need to remember is that if the amount of mortgages issued decrease, then house prices start to decrease. Albeit with a bit of a lag. And it’s that ‘lag of naivety‘ that catches a lot of property investors out. Just like during the roaring 2000s and everyone was a property investor and then the bend at the end came in 07/08 and it ruined a lot of people. Well now we’ve had the roaring 20teens and now is the beginning of the bend at the end. Remember, the trend is your friend……..until the bend at the end…

c.) So now we are in a situation where ‘quality borrowers’ have dried up. Banks have so much toxic debt on their balance sheet that they don’t want to lend to people. The government wants the party to continue so it tries to entice banks to loosen mortgage eligibility criteria. I won’t be surprised to see proper 100% mortgages or 110% mortgages like in 2008. But everyone’s finances have been hit hard and so the whole market is now frozen. No more buying, no more selling. (This freeze of prices will also catch some people out).

But remember, less mortgage issuance = prices drop and there’s the biggest economic storm ever upon us and it won’t be long before a major bank goes bust or needs bailing out. (Keep your eyes on a major property builder/lender or Deutsche Bank). This will be the final blow to mortgage issuance and property prices will plummet in general. More so with the higher-end houses.

3.) Also don’t forget that in market crashes, it’s the middle-class that get wiped out. Not the lower-class. The lower class typically have no market exposure and aren’t the ones going out and getting £150k+ mortgages. And it’s the lower class that typically get bailed out with social programs when shit really hits the fans. But it’s the middle-class that get obliterated and it’s that demographic that does the bulk of house-buying. Also everyone has had a big reality slap that they need 3-6 months rainy day fund due to income insecurity. So what we will see is that people who were saving up for a deposit, will now be reluctant to blow £10-50k on a house deposit and instead be more frugal and think twice about buying stuff.

4.) Also mortgage delinquency rates are exploding in the Western world right now due to this economic/pandemic debacle. So we are now entering an eerily similar set up to what happened in 2006/7/8 where people starting forsaking their mortgages en masse. Evictions and the house going back to the lender take some time to play out which then creates another lag which catches people out. But when houses go back to the lender, the don’t do anything fancy. They offload the properties as fast as they can as it’s a big old negative weight on their books. So they simply package up hundreds or thousands of delinquent properties into a security and then flog that security on the markets hoping there are other banks or big investors that want to buy a small town :-S But these are essentially junk bonds/junk assets. So no one buys them, or if they do get bought, they’re at a massive discount. So this immediately drops overall house prices.

5.) Long story short, in general, I’m massively bearish on UK, US and Canadian property prices.

I’m personally going to wait until we see the equity markets capitulate (something like a 70-80% crash from top of drop) and then we will quickly see metaphorical blood in the streets as the media propagates the scale of this crash.

Debt destruction (delinquencies) is actually a form of currency supply contraction and so there will be scary signs of monetary deflation and so the Gov will shit themselves and do even more ridiculous stimulus to bat away deflation (which is what actually kills Governments). The insidious thing that happens here when deflation kicks in is that countries start defaulting on their obligations. So they go into stimulus overdrive. Then big inflationary effects kick in and accelerate out of control and combined with countries falling into junk ratings and defaulting on obligations, interest rates then zoom up. This is the final nail in the coffin for a nation. A central bank like the Bank of England can control interest rates in a small localised range, but it’s the global bond market that really dictates rates. Regardless of rate increase mitigation measures. Which is why you see events like Greece rates rising from 4% to 23% in a year! Anyway, when rates rise, that’s the big property price crash instigator. And this simply exacerbates the current downward cycle of people forsaking their mortgages.

For example: On a £200k Standard Variable Rate mortgage, for every 1% rates, go up, the homeowner’s mortgage goes up an extra £120 per month roughly. So if rates go up even slightly to 3% then the homeowner will have to fork out an extra £360 per month just to keep their house. And most people can’t afford an extra £60, let alone an extra £360 per month! It’s all very scary.

Anywho, during this crazy stimulus, I’ll personally try to borrow as much cheap/free credit as possible to then immediately put it in non-inflationary assets like land/some property outright, Bitcoin, bullion and de-levered cash-flowing businesses. The big inflationary effects will eventually trickle down into the economy and simply inflate the prices of these assets. 

That’s my plan at least. Remember, history doesn’t always repeat itself but it really does rhyme rather well as human nature and government actions never change. So for the love of Elon, please don’t just go out and buy a house to rent out like every man and his dog is doing at the moment. You’ll get roasted and stuck in negative equity.

P.S. This may piss off some people and I’m not here to get drawn into lengthy debates, but I feel the public need to hear this information/side of the coin. Please, by all means, add to any factors I may have missed. You don’t know what you don’t know. 

P.P.S. I feel like a meteorologist at the moment trying to warn some farmers to not plant seeds and refrain from buying an extra tractor. And they’re like “I’ve been farming all my life, I know more than you about farming!!!!” Meanwhile, oblivious to the farmer, the biggest hurricane in history is inbound just beyond the horizon… Time to hunker down folks and wait for the dust to settle before wasting a wad load of capital on a deposit!

P.P.P.S. I have no commercial affiliations, but eventually, when you do need a mortgage, go to @Justin Fordham from JF Financial. He’s literally the most honest and genuine mortgage advisor you’ll meet and he’ll tell you straight whether he can or can’t help you. 

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