A Dodgy Housing Market

The U.K. has been perhaps the hottest housing market in the developed world this year, and London’s housing market is even hotter, as I reported in “London has Gone Bonkers” on June 23, 2014.

Now, the sh*t is starting to hit the fan.

Rightmove is like the Zillow of the U.K. and it surveys 90% of the residential housing market. Its most recent survey found that prices dropped 2.9% in August (2013) in the U.K. and are down 3.7% since it peaked this past May as the chart below shows.

London was down 5.9% in August — double the average decline.

See larger image

Average U.K. prices have moved up 12.5% just this year from around £240,000 to £272,275 in June ($455,447). In London, the price rise has been over 20% to a high of $922,300!

They call it “panic selling” in London. Households are trying to cash out of overpriced homes at the very top of the market. This is described as the worst monthly downturn seen in Rightmove’s history.

Even the best performing London neighborhoods were down between 1.9% to 2.7% and that means there is nowhere to hide.

I have a close friend who lives in the suburbs of London and he is in disbelief at the prices of very ordinary houses — it’s worse there than in Vancouver and Sydney!

Buying in downtown London is dominated by foreign buyers even more than New York City! Foreign buyers are at 70% in New York, compared to 50% in Manhattan. What happens when these uber-rich start selling? They are the “smart money” after all.

This top 1% group of multi-millionaires and billionaires feels that such major cities are the safest place to park large amounts of money. What happens when they begin to lose faith, as it’s beginning to happen in Shanghai, Shenzhen and Beijing?

According to CoreLogic, we just saw the highest number of $1 million plus mortgages issued in the U.S. — 15,000 in the second quarter alone. As with the U.S. economy, the generals are advancing at light speed while the troops are stalling or falling back.

According to the S&P/Case-Shiller 20-City Home Price Index, prices were up 9.3% from May 2013 to May 2014. For the top 1%, sales of homes $1 million plus have been up 8.5% since a year ago and prices are up 5.2%. Homes under $100,000 are down 12%. The rest in the middle are down 2% on average. One percent are still booming while the 99% are sucking wind.

Home ownership in August sank to the lowest level since mid-1995, down to 64.7% from an all-time high of 69.2% in June of 2004. That means 4.5% of households have lost or given up their homes.

Mortgage applications are also at the lowest levels in decades as first-time buyers are too scared or credit-poor to buy.

Demographic trends say they should be buying more aggressively by now, but they aren’t, even with extremely low mortgage rates.

Some of the very rich are borrowing more strategically now. They can get very low mortgage rates and not have to dip into their very lucrative stock portfolios and miss the high gains of the past five years.

This is exactly what artificially low interest rates from central bank policies create: greater speculation and bubbles that ultimately have to burst simply of their own extremes.

There isn’t an economic crisis or major slowdown in the U.K. or the U.S… yet. Home prices are slowing or falling because they’re getting too expensive, even with the constant decline in mortgage rates this year. In China, the greatest global real estate bubble in modern history is showing signs of cracking as we have been forecasting.

Home prices have been down for three straight months and 64 out of 70 cities have reported average losses of 0.9% this past July. Beijing was down 1.0%, Shanghai dropped 1.2% and Guangzhou 1.3%, with the worst two cities down 2.4%.

You should have a copy of my book, The Demographic Cliff somewhere on your desk. On page 146, I identify 10 summary principles of bubble booms. Let’s review Principles #3 to #6:

#3. Bubbles always burst; there are no exceptions.

#4. The greater the bubble, the greater the burst.

#5. Bubbles tend to go back to where they started or a bit lower.

#6. Financial bubbles tend to get more extreme over time as credit availability to fuel them expands as our incomes and wealth expand.

If the real estate bubble goes back to where it started in January of 2000 or a bit lower, the U.S. will experience a 40% decline or more from here, and London will see 60% or more. Ouch! I think even demographically-favored Australia will see 30% plus declines in cities like Sydney and Melbourne.

Earlier this week, I showed how the capitulation of bears in the stock market was right in line with principles #7 and #8.

Review these 10 Principles of Bubbles once a week or so to keep your objectivity and sanity in this insane economy.

Just as most investors gain more confidence in the stock and real estate rallies — recognize the bubbles for what they are and make the “smart money” moves sooner rather than later. Sell now or as soon as possible, especially in real estate, as it can get very illiquid fast when people realize that another crash is beginning.

Harry

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Categories: Economy

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.