Thursday, June 22, 2006

The STR (Sold to Rent) phenomenon

People who STR (Sell to Rent) are those who have sold their house's and are renting, in the belief that house prices will crash, enabling them to buy them back again at a lower price. This is a new phenomenon, which didn't exist during the last housing boom, and very unusual as it's difficult to "trade" houses as though they are shares as the transaction costs are very high and prices are not transparent (i.e. one share in Marks and Spencers is exactly the same as another share in Marks and Spencers and has the same price, whereas one house in a given city is not like others).

The phenomenon seemed to grow around the time of 9/11, when many became convinced that houses were overvalued and that global events meant houses were "sure" to crash.

Web-sites such as HousePriceCrash were set up, as well as property forums on The Motley Fool. Economists piled in, notably Roger Bootle of Capital Economics (who writes for the Telegraph, who predicted a 20% crash by 2007), and David Pannel of Durlacher who predicted a 30% crash by 2007. HousePriceCrash urged people to sell-up to "force" a crash, forgetting that for every seller there is a buyer, and that sellers only cut their prices if they are desperate - i.e. you need forced selling due to unemployment to have a housing crash.

When nothing materialised from 9/11, desperate STR's cast around for other events that would precipitate a crash - the Iraq war, Al Queda, bird flu, the price of gold rising, the price of gold falling, housing in Shanghai and in Florida, the state of the German economy and the state of Italian economy. STR's diligently search the web, eg posting about worldwide job losses announced by Dresdner Bank even when they don't affect the UK. Jobs created are ignored. Conspiracy theories abound - that the Halifax, Hometrack, Rightmove etc manipulate their house tracking statistics, that the Consumer Price Index is inherantly flawed, that the Monetary Policy Committee of the Bank of England is "instructed" to keep interest rates low. I expect the sad death of David Walton today, the MPC member who voted last month for a rise, will spawn any number of conspiracy theories.

It's easy to laugh at the STR's, but they are suffering real pain. Some sold their houses as long ago as 2001 - only to see house prices march upwards until 2004, where they formed a plateau to the current date, so that the STR would have to borrow quite a bit more to buy back the same house. To add insult to injury, interest rates have remained steady, but rents have been rising all the while, so that if they'd stayed put, their monthly outgoings would have remained lower than they are now.

So how did they come to make such a big mistake? Most STR's tend to be Tory voters. Central to their world view is the belief that of course Labour is worse than the Tories, and therefore if the Tories had a house price crash, not only can Labour not avoid it, but it's "bound" to be much worse. This belief even colours the views of the economists pronouncing on the subject (breaking the classic rule of not letting your prejudices colour your judgement). They've bought wholesale the Tory propaganda that the Labour economy is sure to fail - indeed the earliest house price crash stories date from 1997, when some people were "sure" that the advent of a Labour government meant a recession and a property crash.

It's an understatement to say that they hate Gordon Brown - it's a constant theme. Here's an excerpt from this post in 22/11/03, "What Rachel [Lomax deputy of the BoE] is doing is laying the groundwork a. for the MPC not to look too incompetent when they fail to deflate the bubble in a gentle manner, and b. to excuse themselves for having sat there and watched while Gordon the Moron created his doomed so called economic miracle, based on nothing more than cheap credit and a housing bubble. "

This post on 14/05/05 "That time will come, I have little doubt, and will involve a million and one shattered dreams, and a completely naked Emperor Gordon whose absurd claims to have eliminated boom and bust, will be shown to have been simply meaningless rhetoric from a ruthless political animal prepared to sacrifice the financial wellbeing of others for his own personal advancement."

This post on 12/12/05, "Not much more than a year ago it wasn' altogether unusual to have people on here remonstrating with me about my incessent pillorying of the pillock in no 11 Downing St. And they were seriously indignant as well, if not a little taken aback. Did I not know that this financial genius from the other side of Hadrian's wall was the architect of an economic miracle the like of which had not been seen for generations ? How on earth could anyone dare to take his name in vain ? Let alone take the p*** out of him as if he were some kind of useless spendthrift old labour type boom and bust charlatan ? Was I not aware that his thrifty presbytyrian housekeeping and canny Scots nose for a bargain had earned him the name Prudence ?

..........If Brown ever does make it into No 10, it will probably only be long enough for Cameron to **** all over him. It really is the economy stupid and by the time the greatest Chancellor in living memory actually makes his move next door, his economic legacy will already be collapsing around him. He will be the lamest of lame duck prime ministers"

Ouch. If they gave Oscar's for rants, that poster would surely win hand's down.

The moral of the story is don't let your prejudices and politics interfere with your financial decision's. And the message for political parties is don't put mis-leading scare-mongering propaganda out there - your own supporters might believe you and lose real money over it.

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