Optimism in the future is waning

In common with many, I am constantly fascinated by the UK property market (especially London’s).  I watched while my parents’ home in a small market town – bought in 1963 for a little less than £3k – was valued recently at around £200k.  In 1963, could anyone envisage this kind of price appreciation for an unassuming house?  I certainly didn’t.

That is why house hunters younger than me are hardly fazed by today’s asking prices. We have been enured to rapidly rising housing costs over the decades (save for the recession in the 1990s).

But now that almost everyone is bullish on constantly rising prices, I have to ask: is it time to be a contrarian?  Is it possible that given the well-publicised projections for few new builds that will not match demand, the ever-increasing population and low interest rates as far as the eye can see, is this real estate party in danger of winding down now?

Here is a fascinating chart I just came across showing the average UK property price over the past fifty years

and what stands out is the textbook five wave pattern.   It is just like many share charts!  Isn’t that a pretty sight? Wave 2 is the slight pullback in the 1990s recession and the takeoff phase in wave 3 coincided with the huge bull market in shares to the 2007 credit crunch top.

And since the wave 4 low, prices have been fueled by the QE/ZIRP policies of the BoE that made mortgages much more affordable as house prices rose and rates fell in a see-saw effect.  Adding to the upward pressure is the government’s schemes for first-time buyers (and now Barclays has introduced  a mortgage with zero deposit, provided parents stump up 10% of purchase price into a 2% savings account).  Barclays evidently are max bullish on housing with this move – just as stocks are.  This is a clear warning – and when values turn down, Barclays will be left with a sore head.

As prices have entered the stratosphere, all sorts of clever schemes have been dreamed up to keep monthly repayments ‘affordable’ with 35-year terms (there are even 100-year mortgages in some places).

But we are now in wave 5 and as we know from Elliott Wave theory, when wave 5 ends, it is all change.  The big question is: are we there yet?

There are clues. London prices are rapidly coming off the boil with asking prices down 20% in some areas. There is a tsunami of supply of high end apartments in the East End and south of the river coming to market.  Wouldn’t it be ironic – and painful for many – if that coincided with a plunge in demand?

Sentiment in the housing market does broadly follow that in the stock market and both are governed by social mood, which has been high in recent months. DSI in the S&P has reached 80% bulls – a near-record and a multi-year high.  That shows optimism is high for the future.

But all around, I detect a turn is occurring.  It may be fanciful to suggest this but with The People rising up against the ruling elites in many countries, could the amazing Leicester City football club’s Big Win be a talisman for this uprising?  They came from bottom, team members were nobodies and are paid (comparative) peanuts, took on the Big Money ruling Manchester-London axis of the elite in the Premiership (you know who they are) – and emerged triumphant.

Another unlikely winner?  The Donald!  His success is just as much an uprising of Main Street against Wall Street/Big Government business-as-usual elite politicians.  In the USA and UK (and EU), many blue-collar workers realise that their lives are not getting better and the elite are to blame, especially with their crazy money-printing sprees that have enriched the 1% with no trickle-down to the 99% that was promised in 2008.

I have no doubt that when the house price downturn does get started, most will not see it coming and negative equity will suddenly rear its ugly head again.  And if interest rates start to rise at the same time, this toxic cocktail will be bitter indeed.

VIP Club members are prepared for the downturn.