Emperor with no clothes?

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  • #53681
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    Anonymous
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    In Mark’s sticky thread “Spanish property market 2007/2008 report discussion”, I noticed an interesting post by Bernard Hornung in which he commented:

    @Bernard Hornung wrote:

    I am begining to question whether there ever was such a huge market in the first place. Perhaps the greed of the developers, coupled with the greed of the commission hungry brokers, together with the misguided aspirations of the speculators created a sense of demand in excess of any actual demand, perceived or realised.

    I find this quite thought provoking, particularly in my position as a prospective cash purchaser in Murcia area who has”backed off for now”.

    You see, I have been travelling back and forth to the area four or five times a year over the past three years, and I’ve always had this very strong gut instinct saying “surely, surely all this development cannot be sustainable”

    So I think Bernard may have a good point. Afterall, where was the market evidence in recent years supporting this massive development program up and down the costas? Could this have been a case of The Emperor with No Clothes?

  • #78945
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    katy
    Spectator

    Exactly, incredible the amount of empty unsold units. I have a friend living in a block at calahonda. There are only two people living in the place and one who rents. Because this is Spain we will never get the true figures but this “crash” has not been sudden. Was another version of the pyramid selling. Amazingly they are still starting and advertising new developments 😯 I think there is a lot of money laundering involved.

  • #78951
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    @katy wrote:

    Amazingly they are still starting and advertising new developments 😯 I think there is a lot of money laundering involved.

    Katy, from where I stand, it is truly amazing!

    To be honest, I’m not knowledgeable enough to know the reasons why, but I do get the feeling that there appears to have been some consensus over recent years, that the volume of developments and their underlying feasibility appears to lack basic logic and does not follow what I understand to be the “usual” economics of property development.

    Can anyone think of a comparable situation, where developers speculatively build two or three times (just a guess) more property than the market requires? Surely the potential problems in the market today are the result of very poor due diligence? And therefore as Bernard suggested: @Bernard Hornung wrote:

    created a sense of demand in excess of any actual demand, perceived or realised.

    So who were/are the Emperors? Are they the Developers? The Agents? Banks? Lawyers? etc

    From here on I feel it will be the prospect(ive) purchaser who will shout out loud from the crowd – “look – no clothes!” And who knows, the Emperor might just hear!

    Jim

  • #78955
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    Anonymous
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    Sun Seeker wrote:
    Can anyone think of a comparable situation, where developers speculatively build two or three times (just a guess) more property than the market requires?

    Yes, in California, Florida, Nevada and Arizona.

    They counted on the mass migration of retired baby boomers and built hundreds of thousands of houses which now sit empty or squatters grow pot or have create met labs. The pools have become mosquito paradises and the lawns (where it rains) are genuine jungles…

    This is why Spain will go the USA way i.e. will be pain in almost all the overbuilt places…

  • #78956
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    Back in 2003 we started being offered a lot of projects towards Duquesa, all with a commercial centre and 5 star hotel. Not just one development, but nearly all would have a commercial centre and 5 star hotel, after a while it was difficult to believe that A) so much commercial premisses would be needed and B) who would stay in these 5 star hotels? It became a bit of a joke. When the lady’s in the sales casettas mentioned how wonderful their unique development was and how they were building another bloody 5 star hotel and commercial centre – I would laugh.

    Where’s the money come from – One developer told me that it was ” Spanish pension money” that was funding these projects. I dont know if it was true.

    I later found out that in order to gain a licence the developers had to make provision for hotels and commercials – many were never built.

    So to get back to the issue in hand, it is simple belief – like dot.com companies in the nineties – when people believed they would make millions from investing in dot.com’s they made money – when people stopped believing – then the whole thing crashed.

    AP

  • #78957
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    I don´t think there is any question the boom happened. My sales figures showed a steady upturn month on month from November 2000 until October 2004.

    In the final quarter of 2004, like for like figures showed an almost identical rate of decline.

    The interesting thing about it all was that the average buyers budgets hardly changed. Even as recent as 2007 (Final quarter) the average buyer in my area was still looking at around 200,000 euros compared to 185,000 in 2001.

    My personal opinion is that those agents who took on resale properties at any price and added abnormally large commissions on top created the over inflated property price curve from 2002 right up until last year.

    The boom began, from the UK buyer point of view, because the average Spanish property price was about half of its UK counterpart. This meant you could sell a house in the UK and buy similar in Spain and live on the difference.

    Now prices on both sides are aligned, hence the need for the cheaper emerging markets. Budgets have still not increased by much over the 7 years.

    I think the larger builders of new property identified the boom a year or so later and small to medium size builders a year after that. By the time finance and planning was through they were a little late and this has lead to half sold resorts and over-supply all over Spain.

    The credit crunch has so far not fully bitten, the exchange rate however has, hence cancellations and delays in people makeing a decision such as sun-seekers example.

    When and if the crunch fully bites, then the real tumble in prices will turn from a looming threat to a deluge, but probably not until the end if the traditional buying season, say around October.

    All of the above is my opinion using my own stats experience and instincts. I shall no doubt be proved wrong.

  • #78958
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    katy
    Spectator

    Spain did sort of price itself out of the market. I remember when the proceeds of an average priced house in the UK would buy you a coastal villa with pool, new car and all the lifestyle trapping and still be left with a substantial cash sum. Of course Spain caught up when they entered Europe.

    Now I think spanish prices have somewhat exceed the UK (except for hotspots). For the average price of a UK house it is now only possible to buy a 2 bed box in Spain, which doesn’t have heating and is only purpose built for holidays or for a couple, not a family home.

    Yes, there was a boom but mainly in the off-plan market, never a legitimate demand.

  • #78960
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    katy wrote:
    Now I think spanish prices have somewhat exceed the UK (except for hotspots). For the average price of a UK house it is now only possible to buy a 2 bed box in Spain, which doesn’t have heating and is only purpose built for holidays or for a couple, not a family home.

    I perfectly agree with this. Before doing my research, I always had the impression that properties in Spain are 1/2 priced as compared to the ones in UK. Of course it was a stupid impression.

    Now I realize that only the illegal buildings in Spain might have those prices.

  • #78961
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    @katy wrote:

    Of course Spain caught up when they entered Europe.

    I don´t think entering the Euro, or becoming a member state caused the property price hike Katy. France, Italy and other European markets never suffered such inflationary rises as Spain has.

    I´m certain it was the lack of regulation in the industry compared to say France, that allowed someone to sell their Taxi in Ealing on Saturday and open an Estate Agency in Estepona on Monday.

    The lack of professional skills, such as, valuation, market controls and fiscal planning lead to self destruction through spiraling house prices.

    When some of those agent grew large and fat, they felt invincible. But when a 3 bed detached in Alicante became same price as its counterpart in Leicester through abismal valuation decisions the agents killed the goose for themselves.

    Had house price inflation been contro led better, we would be looking at a drop in the market similar to what is expected in the UK. However, it was not, and therefore we can expect much worse.

    ralita often criticises the poor quality of Spanish new build apartments and is quite right to do so. I touched on the reasons in my previous post, and cite the low UK budgets for this. The developers have to build cheap apartments for the cheap UK low-budget market. Spanish buyers seem quite happy at the quality, they have far worse from the Franco era to measure them by.

  • #78964
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    @peter Good wrote:

    we would be looking at a drop in the market similar to what is expected in the UK. However, it was not, and therefore we can expect much worse.

    .. like Alistair Stewart of Dresdner Kleinwort is expecting for the UK market on this link, see the parallels, and how it might turn out to be a whole lot worse here.

    http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article3406268.ece

  • #78965
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    @iano wrote:

    .. like Alistair Stewart of Dresdner Kleinwort is expecting for the UK market on this link, see the parallels, and how it might turn out to be a whole lot worse here.

    http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article3406268.ece

    Interesting comments.

    In my view however, the difference is that the UK generally has a shortage of new housing stock (other than some moderate oversupply in the market for flats). So any “crash” in the UK is only likely to affect the paper value of housing stock, and impact mainly on those who are currently (or in medium term) buying, selling or are in arrears with mortgages. This will therefore result in a real slow down…but not devastation.

    It is highly unlikely that we’ll see many major developers in the UK getting into trouble of the scale predicted in Spain. The reason for this is that UK developers generally carry out a lot of robust market research on each site. Sites themselves tend to be much smaller and certainly do not require hotels, golf courses, restaurants, shops, major roads and water treatment plants! They build where there is sustainable evidence of demand.

    Exposure is managed and the UK banking community insist on such diligence being carried out as part of detailed risk appraisals completed when providing development finance. An important point is the difference between how new build properties are financed.

    In Spain, I believe it’s a model that requires pre-sales (off plan) to drive cashflow with customers committing substantial cash deposits in exchange for “discounted” prices, and backed by a solid(?!!!) bank guarantee. (enough said!)

    In the UK, developments are on the whole completely speculative with the finance model having no reliance on customer presales and large deposits to drive cashflow. Rather, the developer usually has to commit 25-30% of the total build programme in cash or value equivalent. Income is only achieved when a customer takes entry to a fully completed property.

    As such, I don’t think you can compare the UK market with Spain. It’s a completely different model. Whilst I’m not an expert on the Spanish market, I feel that the only evidence to support the scale of recent development is… hype!

    At least in the UK, everyone involved in a new build development will be able to get out intact. Developments might take a little longer to complete. Banks might suffer small losses if a developer goes bust. Purchasers may be delayed entry. But in the end, the projects will be completed…will be built to a decent standard…and will be legal.

    Mind you….there’s always a first time for everything!

  • #78966
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    Some interesting points in the article iano.

    Though the references to UK fraud do seem rather tame compared to the Spanish equivelent. I think Britains housing problems read more like a “Joanna Trollop” novella compared to the “Irvine Welsh” Spanish variety.

    I´m certain the Spanish market has further to fall than the UK for all sorts of reasons.

  • #78967
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    @APotter wrote:

    So to get back to the issue in hand, it is simple belief – like dot.com companies in the nineties – when people believed they would make millions from investing in dot.com’s they made money – when people stopped believing – then the whole thing crashed.AP

    I tend to agree. Not to mention the crash that never happended – The “Millenium Bug!” 😉

  • #78971
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    Sun Seeker wrote:
    …..In my view however, the difference is that the UK generally has a shortage of new housing stock (other than some moderate oversupply in the market for flats). So any “crash” in the UK is only likely to affect the paper value of housing stock, and impact mainly on those who are currently (or in medium term) buying, selling or are in arrears with mortgages. This will therefore result in a real slow down…but not devastation……

    Quote:
    Wishful thinking me thinks

    Simple question: If there is a housing shortage in the UK, why have rents not risen in the last 5-10 years, just as house prices have?

    The UK House Price Bubble, has been driven by the loose credit facilities, which have come to sudden abrupt thanks to the world-wide credit crunch.

    All banks are tightening the lending rules and therefore people will not be able to borrow the huge sums they previously could in the UK.

    Be prepared for 30-40% falls in property prices within the next 24 months.

  • #78973
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    katy
    Spectator

    Despite all the predictions for a house price crash in the UK it doesn’t seem to have happened, infact, according to some newspapers they have increased. What does seem to have dipped are the ones that are/were marketed as converted factories/warehouses etc. that were mainly buy to let.

    I think it is impossible to compare the UK with Spain.

  • #78978
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    @jaseywasey wrote:

    Wishful thinking me thinks

    Simple question: If there is a housing shortage in the UK, why have rents not risen in the last 5-10 years, just as house prices have?

    Don’t confuse the investment market with owner occupation. Property yields have been rediculously low for some time now. With low / stable interest rates, there has been little growth in rental income not only in housing stock, but also commercial properties. It has been a strengthening in yield over the last 5-10 years that has increased capital values…but this has also been hugely distorted by the buy-to-let boom.

    Now, we have too many landlords looking for a return. Thats the sector where there could be big problems as many are too highly borrowed.

    @jaseywasey wrote:

    Be prepared for 30-40% falls in property prices within the next 24 months.

    No chance!! This is not Spain 😉

  • #78980
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    katy

    the average house price on the estate where i live has risen by about £20-25,000 in the last 12 months, and shows no sign of falling. (60 miles north of London)

  • #78981
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    @Sun Seeker wrote:

    @jaseywasey wrote:

    Be prepared for 30-40% falls in property prices within the next 24 months.

    No chance!! This is not Spain 😉

    Land Registry Figures – Q4 2007

    UK house prices crash in certain areas of the UK in final quarter of 2007 – Land Registry

    The latest fourth quarter Land Registry statistics have shown that house prices in certain areas of London have crashed in the last quarter of 2007. These prices could be the first indcation that the much discussed ‘credit crunch’ has finally begun to eat away at house prices in areas that were previously deemed to be impregnable.

    The City of London was perhaps the biggest casualty, the latest data sugesting a quarterly fall of -17.5% in the final quarter of 2007. However, Land Registry are generally at pains to point out that the statistics sample used for analysing City of London house prices in particular is relatively small and therefore no real trend can be judged from the figures.

    These latest figures must be judged on the basis that they ‘lag’ in as much as the data relates to prices recorded up to six months prior to Land Registry’s publication; some transactions relate to the summer of 2007.

    London area quarterly house price falls:

    Lambeth -10.7%
    Hammersmith and Fulham: -7.5%
    Southwark -2%
    City of Westminster: -11.1%
    Camden -9.7%
    Merton -13%
    Other areas of the UK also experienced spectacualr house price crashes during the last quarter of 2007, with the Forest of Dean being one of the first areas to ‘go year on year negative’ with prices falling annually by 1.1%. Hertfordshire plunged by -3.7% in the last quarter and Brighton and Hove by -1.6%. Guilford crashed by a stunning 9.7% in the last quarter of 2007.

    Other UK areas showing significant quarterly falls:

    Forest of Dean:

    Average Cost: £214,914
    Detached: £289,319
    Semi-detached: £172,821
    Terraced: £140,318
    Flat: £109,629

    Change in last quarter: -8.9%

    Change in last year: -1.1%

    Hertfordshire

    Average Cost: £297,816
    Detached: £558,087
    Semi-detached: £317,195
    Terraced: £249,085
    Flat: £191,072

    Change in last quarter: -3.7%

    Change in last year: 8.2%

    Sales: 5739

    Kettering

    Average Cost: £159,986
    Detached: £242,267
    Semi-detached: £152,663
    Terraced: £125,520
    Flat: £95,989

    Change in last quarter: -5.7%

    Change in last year: 1.2%

    Sales: 521

    Brighton And Hove

    Average Cost: £272,484
    Detached: £439,177
    Semi-detached: £311,910
    Terraced: £313,911
    Flat: £215,059

    Change in last quarter: -1.6%

    Change in last year: 9.8%

    Sales: 1461

    Guildford

    Average Cost: £368,475
    Detached: £626,519
    Semi-detached: £318,611
    Terraced: £274,650
    Flat: £237,411

    Change in last quarter: -9.7%

    Coventry

    Average Cost: £144,161
    Detached: £259,147
    Semi-detached: £165,533
    Terraced: £127,377
    Flat: £111,702

    Change in last quarter:-6.0%,

    Change in last year: -1.7%

    Sales: 1277

    http://firstrung.co.uk/articles.asp?pageid=NEWS&articlekey=9080&cat=44-0-0

  • #78982
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    Anonymous
    Participant

    Check your own area’s figures with the Land Registry Seach Tool on the BBC website…..

    http://news.bbc.co.uk/2/shared/spl/hi/in_depth/uk_house_prices/html/houses.stm

  • #78983
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    katy wrote:
    Despite all the predictions for a house price crash in the UK it doesn’t seem to have happened, infact, according to some newspapers they have increased.

    That was Daily Express which is not the most trustable…

    Serious newspapers gave all the reason for expecting a decrease of price in UK. It won’t probably a crash like in 1989-1993 but the the boom is over.

  • #78985
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    ralita

    i think what with the economic situation, credit sqeeze etc, people have been talking house prices down in the UK for some time, and now in some areas it’s happening. However i think any comparison to what’s going on in Spain is wrong, due to the supply and demand situation as well as the corruption situation now being aired.

    I have a small factory close to the town centre, and they are desperate for low cost residential housing in that area (the equivelent cost of the thousands of unwanted 2 bed flats in Spain) and the moment low cost housing becomes available, they sell. Could be similar situation in Spanish inland cities i guess, but i don’t if that’s the case? Certainly they don’t sell as fast here as a year or two ago, but demand is still high, and most people watching the news or doing their homework on the internet will probably feel the buying process in the UK is now safer than ever compared to what’s being exposed in Spain.

    I might well be proved wrong, but that’s my gut feeling for now, based on my own experience in buying in Spain and what’s going on around me in the UK.

  • #78994
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    @jaseywasey wrote:

    Land Registry Figures – Q4 2007

    UK house prices crash in certain areas of the UK in final quarter of 2007 – Land Registry

    …etc

    I agree with you that prices are falling and will fall further. I just don’t feel that we are likely to see 30-40%. Good link for the stats though. Thanks!

    @goodstich44 wrote:

    However i think any comparison to what’s going on in Spain is wrong, due to the supply and demand situation as well as the corruption situation now being aired.

    I agree goodstich.

    My original post was to question the underlying assumptions that fuelled the massive increase in the number of developments in Spain over the last 5-7 years in particular. Other than “massive hype” was there actually any good market evidence to support the new build programs of dozens of developers, building 000’s of properties, within a few miles of each other, building golf courses, hotels etc etc??

    Hence, I thought of the Emperor with No Clothes.
    Jim

  • #78996
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    katy
    Spectator

    It was an apt description, happening in all the other “new hotspots” the agents were advertising, Bulgaria……etc.
    All the projects had a hotel to get through the junta’s priorities for building on rural land. Most never materialised, like many other amenities!

  • #79009
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    goodstich44 wrote:
    i think what with the economic situation, credit sqeeze etc, people have been talking house prices down in the UK for some time, and now in some areas it’s happening. However i think any comparison to what’s going on in Spain is wrong, due to the supply and demand situation as well as the corruption situation now being aired.
    .

    Please read

    http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/21/cmbtl21.xml&DCMP=ILC-traffdrv07053100

    How many apartments in Spain have seen a 50% reduction as these flats in Manchester:

    “In Manchester, a repossessed flat bought for £178,000 in 2004, was recently offered at a London auction with a guide price of just £80,000. At a similar Manchester development, City South, one new flat was bought from the developer in 2001 for a just under £140,000 – it was sold a few months ago for just £87,970.”

  • #79012
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    katy
    Spectator

    The very same Telegraph that was urging everyone to Buy, Buy 🙄

    I have never had much luck with the rental market in Spain. More hassle than its worth. It is a nightmare in Spain there are so many dodgy tenants, especially the long-term ones. They have everything sussed and know they can live rent free for at least a few months. One urbanisation I know is having probems with renters as it seems to have attracted all the riffe raffe.

  • #79013
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    katy wrote:
    The very same Telegraph that was urging everyone to Buy, Buy 🙄
    .

    Who did not urge the same?

    The journalists got rid of their housing stocks and now have all interest to talk the market down…

  • #79017
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    Anonymous
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    ralita

    i’m sure there are pockets in the UK where things are bad, and i’m sure it’s going to get worse, but only on a tiny scale compared to Spain, and has the situation bottomed out in Spain yet?……..i don’t think so, i think it’s going to get far worse before it gets better?

  • #79023
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    goodstich44 wrote:
    ralita

    i’m sure there are pockets in the UK where things are bad, and i’m sure it’s going to get worse, but only on a tiny scale compared to Spain, and has the situation bottomed out in Spain yet?……..i don’t think so, i think it’s going to get far worse before it gets better?

    I think both UK and Spain (together with USA, France, Italy, you name it) will get way worse before is going better.

    The overstreched people and banks are in for a painful period…

  • #79481
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    Sun Seeker pointed me towards this thread through a PM, and I am pleased that some of my comments are of value, even if just thought provoking.

    Many property developers in Spain were granted planning permission on the projected employment their leisure developments would create.

    The decisions on what to supply the market with were not based on possible consumer demand, but more on creating employment. Hence the golf courses, five star hotels etc..being promised to the Town Hall by the developer as he knew that this approach would secure him a higher chance in planning being approved.

    Portugal encouraged the development of 5 star hotels and now there is a shortage of qualified staff to work in them, which is just as well as there is insufficient demand.

  • #79483
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    katy
    Spectator

    Yes, they have to fulfill the economic benefit criteria. Of course many developers didn’t actually get around to providing the golf courses or the 5 star hotels were turned into “apart-hotels”. Much the same as in the UK. shopping centres are allowed to spring up on the basis that they will create xxxamount of jobs.

    Off topic but all the new hotels seem to be “5 star” 🙄 Having stayed in some the junta must have a funny criteria for awarding stars!

  • #79484
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    Anonymous
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    I assume that 5 star hotels offer many more employment positions than 4 or 3 star, and so it is all another bluff. Plan a 5 star hotel to get you the right tick in the right boxes and if you ever get around to delivering your promises, decorate it and run it like a 4 or 3 star establishment.

    We had incentives offered to us in Portugal to build an 18 hole golf course and two, 5 star hotels. Thankfully we turned these down and reached an agreement with the three empty 18-hole courses adjacent to where we are thereby helping them to increase their green fees, and then reached an agreement with the government to develop 4 star hotels. We managed to increase the positions of employment by building 640 loose boxes for horses, which employ one person per 17 loose boxes.

  • #79485
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    Anonymous
    Participant

    I think a good guide to your area and what might happen is here

    http://www.nethouseprices.com/

    This is real data, not misleading stastics from the land registy where you don’t know what the comparsion is against. Maybe that 9.7% decline in Guildford (close me me) was 50 very nice detached houses in a good area and the last quater 50 not so nice in a worse area. It’s not a very good guide.

    According to the above link, you can look at a specifc house in a specifc road.

    Now pick Guildford, pick a random road from http://www.maps.google.co.uk and see the increase in a specifc house. You can see many houses that may have been bought in 2002 etc and then sold recently.

    Do the maths as our American friend say. I bet you will find most properties have risen by about 5% a year (compounded over a 5 year period)

    Given wage rises around 3~4% over that time it tells me house prices have about risen with wage inflation. So in effect no real growth (well a little).

    There is absolutely no way houses prices will fall 30%~40% in the Guildford area, they have remained flat effectively over the last 5 years.

    Faceless statistics are very misleading.

  • #79486
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    katy
    Spectator

    I agree, I had a place in Kingston-on-Thames and I wish I had not sold it 🙁

  • #79488
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    Anonymous
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    I agree with jp1, that if you use statistics you need to qualify them as well as identifying their source and how they were obtained.

    Equally it would be incomprehensible for property values to fall dramatically in such an established area as Guildford with near full employment, unless there was some major catastrophe.

    Any fall in price increases affordability and as long as you have young people in full time employment, then they will form the group of first time buyers which tends to cushion the fall. As prices drop the incentive to purchase increases, particularly when you reach a situation when rental payments exceed mortgage payments.

    The key indicator will be how many young people there are in full time employment currently renting and who would, if it was affordable, buy their home.

  • #79494
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    Anonymous
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    Actually for no real reason.. I have just done that.

    The random road was Bray Road and the very last sale was November 07 at 385k. Last sold in August 02 at 275k. 40% increase, which is a rise of 7% annually (compounded). I have no idea if its been improved. I would image so as it’s the norm. But even if it hasn’t it’s not far out from my other post.

  • #79497
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    Anonymous
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    I must stop doing this…

    Now look at Harrogate, selected because I have family living there, and I know of the HUGE rises in property prices. Again this road was random, but it was about the 5th road chosen where I could find a house sold pretty recently having been sold 5 years previously.

    Hookstone Drive, Sold August 07 625k, sold May 02 305k, 105% increase, Annual rise of 15.5% (compounded).

    Now not necessarily Harrogate but it will be similar regions that will see large price falls because they have massively outstripped wage inflation over the last 5 years.

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