The Business News Source

With the latest news that house price decline in the UK has hit double digit numbers, and that the decline is even more rapid than at any point in living memory. We are following through with a suggestion we made some time ago … if house prices are bound to fall at least 30 percent then offer 30 percent less.

Some of our readers declared that they were terrified at the concept of offering that much less for a property they wanted. Well, in the near term the answer is, unless you do, you’re going to lose money .. a lot of money.

An approach suggested by some other readers is to beat the estate agents at their own game. Simply, you get some of your friends to sign up with the same estate agents as yourself and they put in the offers at a lower value than you intend to. In recent weeks many estate agents are so short of orders going through the books that they themselves become your best friends prompting the seller to accept much lower (quote - ‘realistic’) offers.

There have been anecdotal reports that this is happening in some parts of London where small groups of city workers have clubbed together to drive prices down to more realistic affordable levels.

It’s clear that such action would be illegal if applied to the stock market or commodity supplies as these cartels often form to attempt to distort markets. However, the housing market is a highly unregulated environment and anyone who has sold or bought a house in the past will be only too familiar with estate agents tactics of ‘talking up’ markets. Clearly it’s now the turn of the buyer to name a price.

As ever our advice is to look at the peak value of properties in the area (October 2007) and offer no more than 70 percent of that value if you wan to be sure of a reasonable starting point for a house - of course you should then barter down.

Anyone who can remember the Thatcher era, will remember that the great mantra at the time was that we were moving to a service sector economy. With steel works and mines closing we witnessed great swathes of devastation cut across many parts of the country. Indeed with steel works, mines and ship builders the closure would render entire communities with 90 percent unemployment.

Over time many of these local economies recovered as incentives to open service based businesses were introduced. Ten years later the economy boomed on the back of ‘being the means to service’ rather than ‘being the means to produce’.

Theories abounded that the ‘new economy’ would mean that the UK would be insulated from any future economic shocks. Indeed the UK seemed to have found secret of economic immunity - small business became the ‘new black’ and we all got on with our lives raking in cash.

Except for one thing, it was really a mirage. The service sector economy was based on a house of cards. People weren’t really getting that much richer, they just had access to more debt. As markets were flooded with easy credit, sewn with reckless abandonment by a new generation of banks and money lenders of all kinds, people just borrowed and spent more, convinced that their primary asset, their house would keep increasing in value forever, and anyway the cost of repayment was marginal with interest rates so low, so who cared?

So now, as the financial world and hence the economy starts to unwind we’re seeing the service sector economy start to collapse like a house of cards - caught in yet another ‘perfect storm’.

With a rash of banks announcing halved profits over the next ten days we’ll see them being picked off one by one as the results roll in. Over on the house price front we’ve seen yet another report of the tenth consecutive drop in prices with the number of sales reaching 1930’s proportions.

This has far reaching consequences; with estate agents closing at a rate faster than 40 offices a week across the country, they are increasing fees to sell stagnant housing - so with your house in free fall you’re now going to have to pay more for the pleasure of losing money. Of course this won’t save the estate agents and so there’ll be a lot of ex-estate agents looking for jobs - somewhere.

The restaurant trade is suffering badly, as people splash out on a takeway rather than splash out on a more expensive restaurant meal. Pubs are suffering massive decline - blaming the smoking ban - but in reality admitting that they can’t compete with low cost supermarkets.

The city of London is off course going through a massive hemorrhage at the moment with as many as 100,00 high earners being thrown onto the job market. Many of these jobless will not ‘sign on’ as unemployed, either because of stigma, or because the payments they’ll receive aren’t going to even begin to cover their exposure.

As these individuals cut back it will be the service sector economy that suffers most - ironically the precipitated demise of the service sector economy will fueled by the demise of the service sector itself. It’s happening already and it’s happening faster than we realize - when the steel works closes, it creates headlines, when your local bank cuts back on staff or your restaurant cuts staff who notices? As with all things there will be a point where it becomes apparent .. so we suggest you look for the signs now. Check out the empty shops on your high street … and be very scared.

News in the UK press this weekend has been full of insightful articles about how the housing market is in trouble and that even financially solvent people have no hope of getting a loan for houses.

Halifax announced that it would require future borrowers to first set up an account with them and save for a few months before they’ll even be considered for a loan - good reason is that Halifax currently offers the best deals on the market. This is a return to the old days before the roaring eighties when you’d have to show your ability to maintain payments and build up a little cash reserve to contribute into your house. Cynics will say that this was because most lenders were mutuals, so they could only get the money from savings and not the market. But thinking back to the dim distant past it is clear that the main reason was that one had to prove ones-self to the local branch manager first.

At the same time the papers where full of various forecasts about how far the housing market has to fall, and how quickly - ranging from 15 percent through to an unlikely 50 percent, the same papers then went on to present proud buyers who’d managed to get 10 percent reductions in the asking price - 10 percent - now let’s think about this. If I borrowed $1m off you and said I’d give you back $850,000 at the end of the year what would your reaction be? Of course .. so it got us wondering, was this person proud of being foolish enough to probably lose money? Why would the papers present this as a success? In our title we given the analogy of catching a falling dagger, perhaps that’s more representative of the reality.

We’ve decided to launch an interesting experiment - instead of advising people to hold off buying a house (there are many reasons one may really need to move or buy a house) we’ve suggested that they act with courage and sense. If the prices are going to drop say 20 percent then offer 20 percent off the average price. Doing this is easy - in the UK go to upmystreet.com enter the post code and offer 20 percent less.

The idea has been catching on at the dinner party scene in London recently with people proudly boasting that the estate agents (realtors) have gone pale faced at the offers. A year or two ago they wouldn’t have ignored such an offer, but today they are desperate to move housing stock (150 realtors a month going bust in the UK), so begrudgingly they pass the offers on.

Whilst this is anecdotal it led us to wondering if the so called ’soft landing’ was in the process of bursting a tyre and going horribly wrong.

The government is doing its best to talk down any suggestion that there is a problem, that perhaps the bubble has burst - which in our cynical mindset means that things may be worse than we imagined.

We’ve been harping on about the housing bubble for some time here at The Business News Source. As we pointed out it wasn’t ‘if’ - but ‘when’ the collapse would happen. OK, so the ‘when’ is now here and the focus has shifted to ‘how much’. We’ve seen figures for the UK’s housing stock ranging from 30 percent to 50 percent over valued. Interesting to see what the guys over at Defaqto make of this….

“According to a report from Morgan Stanley, co-authored by a former adviser to the government on the housing market, David Miles, house prices will fall by 15 per cent in the next two years, leaving one in ten homeowners with negative equity. Yet, during a speech last night, Bank of England Monetary Policy Committee member, not to mention chief economist at the Bank, Charlie Bean, said that only 5 per cent “of mortgages have less than 20 per cent equity in their home.”
This is what Morgan Stanley says. It thinks prices will fall 10 per cent this year, and 5 per cent next. (By the way, that is almost the opposite of what Capital Economics says, it predicts a 5 per cent fall this year and an 8 per cent next.) As a result of its expected falls, the Morgan Stanley report says 13 per cent of all mortgage loans that were outstanding at the end of 2007 will move to negative equity. Furthermore, Mr Miles says, the final figure will be worse than that, as the figures take no account of those who took out mortgages in 2008.
But it gets worse. For Morgan Stanley also believes that prices could fall by 25 per cent, leaving one in four with negative equity.”

We’ve got some strong advice to anyone considering buying a house in the UK at the moment - in order to build in some buffer for that dream house we suggest that you seriously offer at least 25 percent less than the current realtors valuation - chances are that if it get sold to someone else, you’ll be able to knock on the door end of this year and they’ll be happy to sell at any price.

With an astounding example of inappropriate timing, the UK’s Council of Mortgage Lenders (CML) yesterday announced that the equity release sector should be encouraged to grow by the government. 

Equity release schemes are designed to homeowners to release cash from the current value of their property - in other words equity release is a mechanism by which you can trade any gain from property prices for more debt.

Now, we weren’t sure we read this correctly, but it seems that the CML is actually encouraging more people to take on extra debt - this at a time when the financial markets are in turmoil, credit is impossible to get hold of and the threat of a house price collapse hangs like the sword of damocles over the overinflated UK housing market.So what are they thinking - well the clue is in the fact that mortgages have all but dried up and lenders are desperate to find outlets to make margin on loans.

So what better than to bring back the age old idea of getting the old, weak and vulnerable to raise cash by effectively selling off part of their homes. Anyone who remembers the early nineties will remember that such schemes abounded at the time, eventually backfiring on the borrowers as interest rates shot up and the borrowers found themselves unable to pay off debts and eventually evicted from homes they had spent most of their lives paying off. It’s a wonder that such schemes haven’t been outlawed or at least strict guidelines attached - and yet here we see the CML actually asking the government to encourage such schemes.

Our view - someone at the CML should stand up for responsible, prudent lending - clearly the CML is a lending body that has its head in the sand - the words ‘crisis, what crisis?’  come to mind.