Reply To: Divorce in the euro zone




Many of the reasons you give are supply/demand ‘market’ as opposed to sound ‘financial’ fundamentals. I’m not being pedadantic, in fact the opposite. The Uk market for several years now had increasingly stretched financial fundamentals, in fact stretched so far from ‘long term trends’ that a correction/crash is much more probable than a levelling off/soft landing that many are hopping for.

Let’s look at a few different markets.

Japan has less land (that can be built on) per capita than the UK and most if not all your other criteria, its prices fell for 15 to 16 years.

USA. Now that’s an interesting one. The increase in interest rates from 1 to 5% and the collapse of the sub prime sector, are not the main reason for the problems (that really are only getting started there).

Although the fed took rates down to 1% mortgages for 90 to 95% of the US market were the same old tried and teaser 5 to 6% 25 to 35 year repayment that dad would recognise. So the toxic sub prime, low rate teaser mortgages only affect a small area of the whole market. So for the vast vast majority of US buyers there has been little change.

What really spooked the market was a huge change in sentiment when Mr and Mrs Alt-A good credit (mainly under 40 years of age) realised that their condo, investment, and 2nd home actually can and is going down not up = lots of new sellers hardly any new buyers.

Spain, well I think many of us know where that’s going both the Brit Costas, general property market and economy, are in for a seismic readjustment. Spain was a poor rural country that is now heavily indebted and has an imbalanced economy. Who now being a ‘rich’ country are going to have to become a net contributor to the EU (ironically to place like Bulgaria where unscrupulous Brits and the Bulgarian mafia can fleece even more Brits).

The UK, just before the last crash all your sound fundamentals of the UK market outlined below were trotted out as to why the market would not crash, but soft land.

1) Not enough building land
2) Increasing population (living longer, immigration)
3) Trend to smaller households due to divorce/separation etc.
4) A relatively well trusted legal system
5) A well established mortgage market, which protects its own backside and will only lend on the true value of a property. Whether the borrower can afford it is another matter.

It is different this time and there are reasons to believe it could be worse. This time property inflation has really affected the whole country and ‘financial’ fundamentals have never been so stretched. This time many more 1st homes have been re-borrowed against to fund BTL’s (and ever more expensive lifestyles) , many BTL’s bought in the last 3 years aren’t cash flow positive, but still they buyt more, banking on a never ending round of capital appreciation. It remains to be seen As the News from the US, Spain and Ireland goes from bad to worse over the next few years, how sentiment in the UK changes. Demand can disappear over night. I for one would no be surprised if over a 3 to 5 year period prices didn’t come down on average 15 to 20%. That of course being an average, which means just like last time a lot of places fall 50%, but we’ll see.

Oh yeh back to the stresses in the Euro zone, yep they’ll be plenty. How that affects the £-E-$, I’ve no idea!