Can the East Dulwich micro economy survive a recession?

[Michael Palaeologus]

What recession?

[karter]

Macroban, are you an estate agent? hmmm

[Jeremy]

There's definitely been a slowdown... but talk of negative equity? This seems rather premature.

[Domitianus]

Jeremy Wrote:

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> There's definitely been a slowdown... but talk of

> negative equity? This seems rather premature.

Maybe not. In today's Times, the estate agent Savills has apparently stated that it expects central London property prices to be at best completely flat and are preparing for as much as a 5% downturn between the end of the month and the New Year alone!!! Simple maths shows that as being a decrease of up to 20% per annum if it continues! And that is coming from an estate agent whose livelihood depends on people buying!!!! If they are projecting those possibilities publicly I think we can assume that they are privately expecting much worse.

[Domitianus]

From Bloomberg today:

The buy-to-let market is in crisis as 40 per cent has been wiped off the value

of new purpose-built investment properties in the past year, a survey by The

Daily Telegraph has found.

Investors have been left facing losses of thousands of pounds on their

properties.

A study of nearly all the new-build flats that have come up for auction in

recent weeks shows they are selling for, on average, just 60 per cent of what

property investors paid for them.

While official figures suggest that the UK property market - including

buy-to-let - is in fair health, there are growing numbers of new-build flats

being repossessed in cities such as Manchester, Leeds, Birmingham, Norwich and

Nottingham.

The prices being achieved by the auction houses are invariably well below the

original prices.

Last week a two-bed flat in the canal side area of Bingley, West Yorkshire,

fetched GBP105,000 - a far cry from the GBP179,995 that it was originally sold for

in July last year. Others have been sold for similarly large discounts.

Many investors who have had their fingers burnt claim that they were duped into

paying too much.

Meanwhile, property experts warn that the problem could get worse, with local

authorities granting planning permission for hundreds of blocks of flats each

week and developers still offering generous incentives to potential investors.

Matthew Loades, an investor who is losing money from his buy-to-let properties,

said: "I think there are tens of thousands of people out there who like me

jumped on the apartment bandwagon thinking they were on to a winner. Now they

are feeling the pain."

Recent research also suggests that two-thirds of buy-to-let investors are not

making enough from their rental income to meet their mortgage payments.

This is because the interest rate hikes over the last year has left investors,

who generally take out variable mortgages, facing much higher monthly

repayments.

The Association of Residential Letting Agents, which represents buy-to-let

mortgage lenders, said 67 per cent of all landlords were making rental returns

of five per cent or less in August - much lower than the very best buy-to-let

mortgages of 5.5 per cent.

Supporters of buy-to-let say most investors should not be hit by the mortgage

squeeze because they are sitting on large profits made in the boom of the last

couple of years.

Official Government figures show that purpose-built flats have climbed in price

by 16 per cent over the last two years.

However, in Nottingham 10 flats are on sale in Brook Court, Nottingham for

GBP89,950 - a sharp fall on the GBP139,000 that the developer was selling them for

as recently as December last year.

Oh dear!

[downsouth]

I'm glad. It will hopefuly allow 'real' homeowners to get a foot on the ladder. It is unfair that ordinary people can be squeezed out of the housing market by those who own scores of properties.

[mockney piers]

I love the duped comment. The only thing that duped them into spending too much money was their own avarice.

Like sub-prime mortgages, if something shouldn't make sense, then it probably doesn't.

[downsouth]

Absolutely. Self-duping must be the new black.

[Alan Dale]

I believe some people have been duped. There are companies who sell buy to let investment property over the phone to lay-people using extremely aggressive sales teams.

the language used to sell them is confusing. 'You can buy a house for ?600' can mean that you can take ownership of a flat and a mortgage for slightly more than the value of the flat and all you have to pay is the ?600 arrangement fee. Oh and the monthly shortfall between the rent and the mortgage..

And the deal structures are intenionally complex. If someone offers a ?100k flat with a 15% discount on completion, guaranteed 6% p.a. rental yield for the first two years and a free plasma TV then it is quite hard to say how much the flat cost.

The chances are that the land registry will get it wrong and just log it as ?100k.

People may have been motivated by greed but I still can't get any enjoyment out of seeing them go bankrupt.

[downsouth]

Neither can I. On the point of the 6% p.a. etc... I looked into one of these deals. Signed up at the roadshow (discount for that day only!) but afterwards read up on what it all meant and double checked the numbers. It didn't make financial sense so took back my deposit.

If you managed to get to the age of 21 without falling down a manhole or trying to swallow fire I assume you will have the commonsense to apply judgement in your day to day affairs. Expecially when you being asked to part with ?thousands. For those who have been 'duped' by their own greed or otherwise we can at least be glad that they will have learnt a lesson.

[macroban]

I have yet to hear of any East Dulwich buy-to-let owners in financial difficulties.

[Domitianus]

Sorry to sound like a harbinger of doom again here but we should be thinking about the implications for house prices in general. Current inflated prices have, to an extent, been driven by demand from the one-trick-ponies who think that house-prices only go up and that buy-to-let cookie-cutter businesses are a sure-fire way to riches. Once that business model is exposed as dubious, or at least far from a sure thing, a source of demand for housing could dry up with subsequent negative impact on all house prices. This, if it happens, will inevitably affect the value of the assets of those who have bought property to actually live in. I re-read a newspaper clipping I quoted from a few months ago in which ABN Amro economists predicted that the global housing market is set for a major price correction (inevitably downwards, I'm afraid). I had forgotten the fact that the same economist considered the UK housing market as over-priced by FIFTY PERCENT!!!! If there is a price correction reflecting even a fraction of that percentage there are many people who will end up badly burnt and that will not just be the buy-to-let crowd.

Incidentally, Alan Greenspan, until recently Chairman of the US Federal Reserve and a highly regarded central banker, went on record recently as stating that he thinks the UK housing market is in for trouble. Gordon 'Smoke and Mirrors' Brown was apparently entertaining him at Chequers last night. I am sure that was an interesting conversation.

[downsouth]

I hear what you're saying but really real homeowners in the main will be unaffected. If it means making do with your current home instead of trading up then that's not so harsh a price to pay is it? One less room is much better than no room at all. Those who will be really affected by the depreciation are the private landlords to whom you alluded. I don't have much sympathy for the bulk of them. It is a much needed correction which because it has come so late has emant many of my friends and relatives have had to move more than 80 miles away just to get on the ladder.

[macroban]

Yes, but, is the East Dulwich micro economy differentiated and immune?

[downsouth]

I don't think so. It has the following in it's favouer - good primary schools, a good strip of shops and the fact that it is cheaper than much of SW London. However, I do think it will take a knock as many of the residents are now newbies i.e. they have homes with a mortgage attached and most tend to go for a variable rate therefore added pressure will be brought to bear on hosuehold expenses. Also, the commercial properties are all beholden to debt also so will be equaly fairweather. As said earlier, the mix of private and public employment will be another factor. Out of interest UBS is laying of 1,500 people as they have made their first loss in a number of years http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/01/bcnubs101.xml . A number of folk in ED are attached to the City beit front or back office and this sort of thing will continue. There are multiple pressures. ED will be affected but I can't see all the shops suddenly closing. It will be the usual flight to 'value for money' which is a self-defined term.

[Domitianus]

My observation would be that so many people have mortgaged themselves absolutely to the hilt in order to get on the property ladder just when the rungs are starting to crumble. In order to see any sort of upside or way out they have relied upon continuing house price inflation which may no longer continue. Increases in interest rates may well stretch beyond breaking point people who have already been encouraged to take on plain silly levels of debt. If people are struggling (or even if they are managing to get by but are in the negative mind-set of negative equity) then they may well tend to cut back on 'luxuries' and avoidable expenses. LL, in my view, sports many businesses that proffer exactly the type of businesses and services that people only really spend money on during the good times. I am not sure if they are likely to last.

[macroban]

> ED will be affected but I can't see all the shops suddenly closing. It will be the usual flight to 'value for money' which is a self-defined term.

> LL, in my view, sports many businesses that proffer exactly the type of businesses and services that people only really spend money on during the good times. I am not sure if they are likely to last.

Lordship Lane today looked very busy for a Tuesday morning. I can't see any signs of a recession except the marked drop in the number of "SOLD", "SALE AGREED", and "UNDER OFFER" stickers in estate agents' windows.

[Domitianus]

It is early days!

[Domitianus]

VERY early days!

[downsouth]

Indeed. And a flight to value for money goods and services is entirely subjective.

Another quarter or so is needed for some of these events to percolate into the wider economy.

[Asset]

Don't you think that the more everyone talks about recessions, property crashes etc. the more likely it is to happen? Self-fulfilling prophecy and all that.

[SeanMacGabhann]

Indeed Asset - see also Northern Rock queues

It's not that Domitianus is factualy wrong - but to keep labouring the point might just tip teh balance. I'm not saying we all go around with fingers in our ears going "la la la" either but, you know...

[downsouth]

Not really. I think people have been predicting a recession for the past 7-8 years now but so far it's not managed it. It can happen sometimes: stock markets are ultimately about the herd instinct and human psychology. But profits are profits and losess losses. If folk are being made redundant and they are not finding equivalent work then that will have an economic effect.

Now that's it from me on the subject...

[Domitianus]

I am chuffed to think I could have such influence, I must say. :)

Whilst I agree that there is the possibility that constantly discussing something can lead to it happening, there is also the danger of not facing adverse possibilities. I think that over the last number of years there has been an almost euphoric belief that property is inevitably going to make the owner money and that is equally dangerous. I think maybe some balance is needed.

[SeanMacGabhann]

Oh I'm definitely in agreement on that score Domitianus

Realism re: bricks and mortar should be possible without going into a full scale recession tho - or am I being my usual hoplessly na?ve self?