Original features, good schools near by and a deli/coffee shop around the
corner. These were the kinds of things that used to determine the value of
your house.
But today “CDOs” are having an equal - but much less beneficial - effect.
These malign influences on the price of your property are collateralised
debt obligations, bundled-up packages of loans such as the mortgages sold to
US sub-prime borrowers who never ought to have been lent a cent.
How did we get to here? Well, believe it or not, UK banks were eager
purchasers of billions of pounds worth of CDOs. Today these holdings are
close to worthless.
After the collapse of Bear Stearns, a previously obscure institution that
became a household name over a weekend, much has been written about how the
CDO barged its way into your living room, an unwelcome guest likely to stick
around for a while. But all that homeowners need to know is this: the toxic
pile of CDOs held by the big banks has caused much of the deep suspicion in
which they currently hold each other. They are not at all keen to lend to
one another - and may be even less eager to give you a mortgage.
As Bricks and Mortar forecast last August, events in the global financial
markets were likely to have the greatest impact on the price of your home
this year. At that time, we had only an inkling of the foolhardiness of some
of the players in these markets, including the UK banks. Now the
consequences of their risk-taking are a problem that every homeowner must
face. The scarcity of finance will depress property prices.
Indeed it may even cause a major lifestyle shift: the British have been in the
habit of moving house every seven years. The slide in transactions resulting
from the difficulty in obtaining finance is predicted to increase this to
every 25 years.
Lower house prices ought to present opportunities to first-time buyers. Yet
they will be among those hardest hit by the banks' dangerous dalliance with
the CDO, callow and immature behaviour that indicates that these
institutions do not practise the prudence that they still have the nerve to
preach.
However, although the banks may be minded to give them the cold-shoulder,
first-time buyers may receive a warmer welcome at the building societies,
whose involvement in the CDO thing was minimal. Nationwide, the sector's
number one, is still lending to first-time buyers, even those with a deposit
of just 5 per cent.
But one of the most popular sources of funds this year will be the Bank of Mum
and Dad; parents who have made a wise investment in property will be using
their equity to turn their children from tenants into owner-occupiers. This
will be an example of mature behaviour, based on the view that the monetary
value of a home is only one of its attractions.
A VIEW TO BANK ON
The marine view (pictured) will set you back £4.5 million. But, for this
price, you also get brand-new house with direct beach frontage, a media
room, a living room, two bedroom suites, a lift with a “honed” limestone
floor and lots more, all detailed in the literature from Savills, the estate
agent handling the sale.
If you are still puzzled that so high a price can be put on the chance to gaze
upon the sunset over the sea, you should know that this is a home on Banks
Road, one of the best addresses in Sandbanks, variously described as
“Dorset's answer to Monaco” and as “Very nice and all that, but where are
the beautiful people?”
The answer to this last question is that the billionaires who settle in
Sandbanks delight in all the publicity about the building boom, in which
shabby bungalows make way for lavish mansions, but also like the privacy
that comes from a lack of celebrity inhabitants. There are perma-tans down
the Peninsula Road, another Sandbanks top location, but no paparazzi.
This is a town where the homes are the stars, including Thunderbird. This
space-age style property, now being let out, was on the market for £3.5
million when Bricks and Mortar reported on the Sandbanks scene in August
2006. Liam Gallagher, of Oasis, was among those subsequently tipped as
potential purchasers. He probably realised that his, well, abrasive personal
style was just not very Sandbanks.
BATHING MATTERS
The bathroom in the master bedroom of the Sandbanks house has a plasma TV
screen. But such expenditure merely reflects the trend in all types of
domestic setting. The point of a bathroom used to be hygiene; now it's
leisure. Expect the crowds in the DIY and homewares stores this weekend to
be around the shower fittings. The ultimate aspiration in this latest
makeover obsession is the £38,697 Papillion bath in marble or granite. But a
word of caution: it weight means that it can be installed only on the ground
floor.
Anne, do you have a tongue in your cheek? You are either a self deluded person, a creation of the Blair Brown project or writing with self interest. I see your professional prospects as a guru of the inflated market could be at an end, I have know idea what your financial interests are - maybe you could be more forthwright on that for transparencies sake.
Your analysis is interesting. You suggest mum and dad should rescue the 'first time buyer' by taking money from their diminishing house equity to fund their childrens purchase of a falling asset?
You suggest that CDOs are the cause of 'the malighn influence' on prices - when in reality it is a catlyst that highlights the problem of 5 years + of talking the housing market up and easy lending that is now, and rightly so, imploding. Worthless CDOs are the result of a deflating housing bubble not the cause.
If all that means that we get to read less dribble by etstate agent types then good. Bring on the serious reporters.
Chris, Dubai,
Even Ms Ashworth is coming around to the notion that house prices are overvalued due to cheap and ludicrous levels of money thrown at all the prices-only-go-up faithful. Are the Chicks bricking it?
David, Guildford,
You don't honestly think that blame lies solely with banks and subprime mortgages do you? The housing market is a huge bubble in many countries and the USA is merely the first one to find out what life is like when it bursts.
Howard, London,
Well done Gareth Jones in Dusseldorf.
I hope more englishmen realise that a house is a home first and everything else afterwards. It may also cure a few other social ills arising from lack of permanency and short-termism.
Was it Napoleon who said that England was a nation of shopkeepers?!!
LAKSHMAN PARDHANANI, GOA, India
I was there today and had a look round. The house on Sandbanks was to be put on the market by the developer at £5 million. But he said the market has dropped, so hence the offers arround £4.5 million. He might acctualy get £4.1 to £3.9 mil in 2008, but that'll fal to £2 ish by 2010.
I take it the rest of the article is an ironic, spoof or wind up?
Pablo, Bournemouth, Uk
"This will be an example of mature behaviour, based on the view that the monetary value of a home is only one of its attractions".
Utter rubbish.
I have a lovely house, nice size, garden and views. That is it's full worth. It could be valued at £ millon, it could be valued £1. It doesn't matter, as it is my home. Why should I care about the monetary value?
If I take equity from it for my kids I still have to pay the money back.
The sooner the likes of you promote houses as places to live, rather than investments, the sooner young people will have somewhere they can afford to live.
gareth Jones, Dusseldorf, Germany
Its nice to see a responsible article further encouraging people to get onto the property ladder as the housing bubble bursts. Still, if you borrow from the bank of mum and dad, they can release the equity from their home to help you out and you can be one happy family in negative equity as the market collapses.
Neil, Dundee,
I don't see price falls as a bad thing at all for first time buyers, so they may have to save more but thats the way it should be. I think if you can't afford to save when you dont have a house you can't really afford to buy a house.
The reduction in the amount you'd need to borrow would more than compensate for the tighter lending, but it all depends on how far prices fall - obviously the further the better for first timers.
I think more and more people are coming round to the idea that unaffordably high house prices are a bad thing.
Simon, Chester,
"Original features, good schools near by and a deli/coffee shop around the corner. These were the kinds of things that used to determine the value of your house."
No they didn't, Anne. They were minor factors. The major one was the valuation of the land, which is subject to cyclic speculative booms and busts, which is in turn driven by availability of credit. So the Bear Stearns factor has always been the major one, it's just that you apparently didn't realise it. Oh, and if you haven't worked it out yet, Anne, "good schools" are simply the schools that have the largest number of well-behaved middle class kids; there's very little in the schools themselves that make them "good" or "bad". Did you really think that the worst teachers are all sent to inner-city schools while the best ones are sent to affluent areas in Kent?
C Phillips, New York, USA
Anne
Bear Stearns was probably quite obscure to residents of Pyongyang but to someone writing about property and finance? It's only as obscure as one's blinkers make it.
And CDOs ducky poos are the clever financial instruments that allowed banks to get debt and thus risk off their books and thus lower the cost of borrowing for many years ushering in the era of cheap credit that ensured house prices lost touch with the fundamentals.
Meanwhile the Bank of Mum and Dad is as likely as the big obscure investment institution on Wal Street to be quaking in its boots at the moment for fear that all that equity built up in that house of theirs is illusory. Unless the BoMaD downsized at the top of the market and enjoy a degree of liquidity they're going to be as bearish as....well Bear Sterns presumably.
Meanwhile I notice that a help line for distressed estate agents is in the process of being set up. Good timing...
Jonathan, Wadhurst,
Anne,
Property was 21% overvalued in 2001 (Cambridge Econometrics in this Newspaper).
How can you seriously suggest that one should ponce of one's parents? Are you suggesting that they should remortgage when the 'worth' (I love that terminology) of their properties will inevitably fall over the next few years?
Sorry the game (pyramid scheme) is now truly up and the emperor really does have no clothes! I hope that you haven't saddled yourself with a load of Buy to Lets in 'up and coming areas' errrrrmmm, like Manchester and Leeds!
Austin Tassletine, South West, UK
Anne
You are a unvoluntary comical genius! Sort of a Ms. Bean. We love your Bricks Chicks... keep up with good work!
Bear Sterns obscure? Too funny!
Michelle, Leatherhead,
I find Reading through your articles, I find that not many people seem to think of buying or building property in Australia, but choose countries were they neither speak their language nor understand theirs laws.
After reading today in our newspaper that Spain are going to demolish many thousands of properties that don’t have legal planning permission!
We would like to recommend to anyone looking to invest in property abroad to take a look at Western Australia; go for a holiday and spend time exploring the different areas.
We have now built 3 properties in over there; one holiday home and 2 investment properties over the last 4 years. It is a place we love but unfortunately we are far to old to get residency, but that has not stopped us going there for holidays. Since we started buying our serviced plots they have gone up but I’ve always been a believer that if you look around, good buys are always available. We have written an ebook about our journey.
Anne Fenwick, Gainsborough., Lincolnshire, UK
Is this just a cack-handed attempt to push some air into a rapidly deflating bubble ? When prices are dropping on the back of a financial crisis, is this really a good time to saddle yourself with a depreciating asset let alone ponce money off your parents ?
Peter Collins, Brighton, UK
Only you had no inkling. Anyone with the remotest grasp of economics and nothing to gain from providing excess debt has been saying the situation was out of control as early as 2005.
Bank of Mom and Dad? They can provide a deposit maybe, but will they provide a gaurantee in an era of low wage growth? This is important as even with a deposit banks are uctting income multiples.
If wages have stagnated and and income multiples fall, the new entrants can do nothing but offer less. This will drive the market down from the bottom even as unemployed bankers drive it down from the top.
Triggers?
Self-certified moving to SVRs, BTL bailing as those who bought since 2005 have subsidised tenants to get capital appreciation. No appreciation and rent growth lagging interest rates and costs. Losses on 1m properties i.e. sell,
Repossessions went up in the good years. Imagine what is about to happen now we are crashing. No money for fiscal stimulus and rates remain high via inflation.
Raj, London,