London 1988 - San Diego 2006

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Submitted by ctlmdjb on September 15, 2006 - 12:23pm

I thought some of you might find my experieince of a previous housing boom / bust in London in the late 1980s.
I graduated in 1987 and started work in central London. It was exactly like San Diego over the last 2 years. Everyone was talking about housing all the time, you had to buy now to get in, areas where getting yuppiefied one after another.
Being young and extremely dumb, I believed the hype and bought a flat (English for appartment) in a victorian house that had been converted into 5 flats. One bedroom cost me 50K sterling in 1988 with a 10K deposit (that my mother lent me). It was in an area known as Tulse Hill, south London, unfortuanetly about 4 miles from the nearest tube station (underground stop - very important to be close in London due to the hideous commute). I borrowed 5 times my annual salary at the time which was the most extreme loan you could get in those heady days. For the first year I actually slept in the living room and rented out the bedroom to help cover costs - but at least I was in! I had bought a house.
Reel forward a couple of years - the UK was trying to protect sterling exchange rates against the Franc and the Deutchmark and as a result interest rates jumped (as high as 11 or 12 % at one point I remember). Sound familiar? Guess what? Housing boom turns to bust. I also had to move for work so I had the appartment valued. Turns out being in this unfashionable neighbourhood a ways from the underground was a bad thing. The estate agent (realtor) wanted to list it at 17K pounds. Other areas had crashed as well, but held their value a little than the outlying districts with bad commutes. I rented it out.
I kept renting it out for the next 10 years through all sorts of crisis, non-paying tenants, new heating system, a flood, a new roof, massive legal battle with the building lease holder who tried to use his building company to screw the tenants, blah, blah, blah. I sold it in 2000 for 70K pounds paid off the mortgage (interest only the whole time) and gave my long suffering mother the rest of the money.
So El Cajon appartment holders get ready! That boom was NOTHING compared to this one...

Submitted by FormerSanDiegan on September 15, 2006 - 1:26pm.

Good thing you didn't sell at 17 K pounds, since it quadrupled to your selling price of 70K pounds.

My thoughts:

1. Buying it was a mistake.

2. ... but holding it, rather than selling after you moved was pure genius
(4x your money in 10 years ... not bad)

What would its value be today ?

Submitted by ctlmdjb on September 15, 2006 - 1:46pm.

Well don't forget I paid 50K for it, not 17K. So with carrying costs over 12 years, the extra 20K didn't come close to even paying interest on my original investment. I also spent significant money on upkeep, rates (equivalent of property tax), repairs. I didn't sell it purely because I pretty much couldn't. But it affected my ability to buy elsewhere as I already had a mortgage. All in all I remember it as an ongoing nightmare.

Today - hard to estimate, probably 150-200K pounds. Which is completely ridiculous for a crapy 900 sq. ft. one bedroom appartment in a poor part of London. It'll crash again.

Submitted by VCJIM on September 15, 2006 - 1:47pm.

How do you get 4x his money? He bought it for 50K, sold it for 70K ten years later. Unless there is something I didn't understand.

Submitted by sdrealtor on September 15, 2006 - 2:08pm.

Looks like you sold too soon

Submitted by FormerSanDiegan on September 15, 2006 - 2:28pm.

VCJIM - If you read the post carefully, he considered selling it for 17K when he moved. Instead he kept it.
From that point forward it quadrupled. Deciding not to sell it then quadrupled his take when he finally sold in 2000. He was definitely better off holding on to it then selling for 17K. (assuming the rents covered at least half of the carrying costs).

Let me illustrate:

Case 1 : he sells at 17K for a 33K loss.
Case 2: He rents it out for 10 years and sells it for 70K, a 20K gain.

The difference = 53K.

As long as his carrying costs minus rents was less than 53K over the 10 years, he came out ahead (monetarily) by keeping it.

So, to reiterate.

Bad Decision = Buying at a peak
Good Decision = Not selling something you already own at a trough

Submitted by ctlmdjb on September 15, 2006 - 2:47pm.

Not really - by that point I owned 3 properties, this one, another I bought later in Oxford (also rented out to students) and one I built in Ireland. I had just moved back to the UK from Ireland and I was renting. So I liquated all the other properties and bought something where I worked in the UK. THEN I moved to San Diego. At one point I had about 400K pounds in mortgage on 3 properties and my ability to pay was completely tied to my ability to rent them all out. The only moral I think is applicable is the collapse in value can be horredous and my experience in London was that it was far, far worse in outlying areas. The pattern was prices rose in the center of town until people coud not afford them. Then outlying areas started to rise, with gentrification following (Brixton for example). Prices in the center stagnated whilst the outer areas continued to rise. Whnen the crash hit, people could suddenly start to afford the more fashionable neighbourhoods again and you couldn't give away property where I lived.

I'd be very suprised if the same thing doesn't happen here...there will be a bloodbath in Temecula for example because most people only live there because they have to and endure the commute. A drop in pricing in Carmel Valley, Del Mar, Cardiff, Carlsbad will KILL the Temecula market. I bet it's already happening. And the drop can be far, far steeper than I think most on this site even realise. Forget 20 or 30%. Try 60, 70, 80% in these areas.

Submitted by lindismith on September 15, 2006 - 3:01pm.

Yeah, when I read those types of numbers, my stomach turns over.

On one hand we need a dose of reality, but on the other....

Submitted by FormerSanDiegan on September 15, 2006 - 3:12pm.

I think the general experience you describe and the impact on outlying areas is definitely relavant and provides an analogue to our current situation in San Diego. It can definitely get U-G-L-Y.

Submitted by mydogsarelazy on September 15, 2006 - 4:14pm.

Hello There,

Just a Murrieta/Temecula resident having to say something about the "Try 60, 70, 80% in these areas" comment.

I am on this board because I agree that there is a bubble and that real estate values are heading for a big correction. Still, I think 60-80% is something that we would only see in a very extreme situation related to -- you name it -- a true depression, national catastrophe, nuclear calamity.

Living where I do I see just how many people are waiting to be homeowners and to raise their families. There are great public schools here, and more and more things to do. As the bubble deflates there will be plenty of people holding their breath and going through escrow. We also have dirt, meaning that there is more development to come, and new homes are an attraction for many.

Put me down as a "Murrieta/Temecula is going to decline 30%" Piggingtonian moderate.

JS

Submitted by ctlmdjb on September 15, 2006 - 4:45pm.

Still, I think 60-80% is something that we would only see in a very extreme situation related to -- you name it -- a true depression, national catastrophe, nuclear calamity

There was no nuclear war that I remember in London in the early '90s. There was a mild recession '90/91 related to high interest rates. My property still lost 60%+ of its value. The market essentially froze - no one was buying or selling unless desperate. The phrase 'negative equity' was commonplace (you owed more than the house was worth). There was talk of a government bailout - it never happened. Problem was any buyers that existed headed for affordable property close to their jobs. Maybe Temecula is different and there's huge industry up there I don't know about...but if a lot of people live there and work in San Diego, good luck.

Why is it people can accept a 60% RISE in value as normal, but a FALL back to the original value takes a nuclear winter? We ended up at 1979 pricing in London as things overshot the other way and then recovered.

The train wreck took maybe 5 years to unfold. We're in year 0.5 and I've already seen 10%+ price drops.

Submitted by BR on September 15, 2006 - 5:03pm.

1992 was indeed when Soros forced the Bank of England to devalue its currency. I wonder what reactions here will be if he does something similar to the dollar a few years hence.

Submitted by lendingbubbleco... on September 15, 2006 - 5:32pm.

All it's going to take for Temecula/Murrieta/Lake Smells-inore to drop 60-80% is this..

People are going to one day wake-up from their comas and go "Oh, my God, I live in TEMECULA/MURRIETA/LAKE ELSINORE!!!...somebody PLEASE KILL ME"

I'm sure there may be some great schools there but what is the typical makeup of the society there? I'd have to imagine it is comprised mostly of hordes of people who would be actually be willing to live in TEMECULA/MURRIETA/LAKE ELSINORE...not exactly the type of people destined for Ivy League schools to begin with.

Also, as for people's desire to buy "new", buying a new house in Temecula is almost as satisfying as buying a brand new Suzuki Aero...sure the car smells new, but people are still looking at you funny.

Submitted by PerryChase on September 15, 2006 - 8:30pm.

lendingbubbleco, I love reading your posts. You convey the feelings well. I wish I could do that. :)

Submitted by VCJIM on September 15, 2006 - 9:34pm.

FormerSanDiegan, just because he *considered* selling it at 17K doesn't mean he quadrupled his money! It simply means he chose not to lose 34K. He bought it for 50K, sold it for 70K ten years later.

Submitted by mydogsarelazy on September 15, 2006 - 9:46pm.

Hi lendingbubbleco,

I think your Frasier Crane issues are showing...

As far as your ideas about what kind of people live in Temecula, I don't have time to argue with you. Need to get to be early, as tomorrow we catch the netjet at French Valley so we can make it to Aspen for lunch with Warren Buffet and his new wife before they leave for Davos.

We hear from Steven Spielberg that she is just lovely!

JS

Submitted by powayseller on September 15, 2006 - 10:47pm.

If London suburb lost 60% in a regular recession, put me down for 80% drops in Temecula, El Cajon, and other far-flung and less desireable areas. Mydogs must be a homeowner, hoping that his property values won't drop. This brings me to another point: too many "housing bears" who cling tightly to the dream their property or town is special, and will have a soft landing. mydogs, you're a great guy, love your posts, but the market will not step out of its way to save you. If you can't handle the drop, sell now. Maybe you are a renter already; good.

Submitted by lendingbubbleco... on September 15, 2006 - 10:54pm.

Mydogs-not exactly sure what to make of the last post there..either you were kidding about living the Robin Leach lifestyle or else the lifestyle of the Rich & Famous is exactly the same as what I do a lot of the time...spend time at piggington.com.

C'mon dude...Temecula???

Submitted by mydogsarelazy on September 16, 2006 - 6:28am.

Hi lendingbubbleco,

In previous post you said:

"People are going to one day wake-up from their comas and go "Oh, my God, I live in TEMECULA/MURRIETA/LAKE ELSINORE!!!...somebody PLEASE KILL ME"

Do I need to explain why I found that insulting?

Also, you stated that you thought that few students from this area would be going on to Ivy League schools. I don't know about other top schools, but three years ago my wife and I gave the Stanford Alumni Association farewell party for Temecula area Stanford freshmen, and there were five.

We don't actually lunch with Warren Buffet, but a guy who beat me up in fourth grade did go on to become Sharon Stone's first husband.

JS

Submitted by technovelist on September 16, 2006 - 6:53am.

We don't actually lunch with Warren Buffet, but a guy who beat me up in fourth grade did go on to become Sharon Stone's first husband.

It must be thrilling to be so famous!

Submitted by powayseller on September 16, 2006 - 7:12am.

Hey, leave Mydogsarelazy alone! Temecula is a beautiful area, and his posts are really good.

Submitted by lendingbubbleco... on September 16, 2006 - 7:16am.

mydogs,

sorry. It is easy to take pot-shots at places like Temecula for fun and that is exactly what I did. I apologize for the insult.

I actually drove through Temecula recently and thought the valley and surrounding mountain scenery were quite pretty.

Submitted by mydogsarelazy on September 16, 2006 - 7:52am.

Hi lendingbubbleco,

The apology is appreciated.

This board is a lot of fun -- most of the time -- and I am glad that my posts are contributing to it all.

I grew up in an affluent part of Southern California in a home that it would now take me a lottery win and three extra jobs to afford. I didn't appreciate it, didn't appreciate the beach, didn't appreciate what it took may parents to make it all happen.

There isn't a community in any price range that doesn't have problems and every community is going to be hit by the problems of over-indebted families coping with upside-down properties. I always thought of myself as a "homeowner" until a a few years ago when I realized that I was more of a speculator, just like everyone else.

I love our big new tract home, hate the insane traffic, wish the beach was closer and worry for California. I would imagine that you do too.

JS

Submitted by speedingpullet on September 16, 2006 - 8:00am.

@ ctlmdjb

OT:

...but Tulse Hill has a BR station, no?

I never understood that "ugh! no Tube!' mentality

When the Docklands Light Railway was built in Lewisham - my manor ;-) - house prices generally sprouted a '1' in front of them almost overnight. "But...but..you have no Underground system in South East London" my friends north of the river would say...despite the fact that British Rail runs from Lewisham to Charing Cross every 10 minutes and takes a grand total of 15 minutes to get to there.
Once the DLR came everyone suddenly saw places like Deptford/New Cross/Lewisham as 'viable' places to live, despite the fact that myself, and a few hundred thousand other people, successfully commuted from that part of London for decades by train.
Oh, how I wish now that I had had the finances, and will, to buy the 5 bed unconverted Edwardian villa with the 150' garden that was going next door to me -in 1994 - for 85K GBP! Now it worth well north of 1/ 2 a millon...

But I digress.
I remember the housing crash of the late 80's very well.
Although most of my friends were too young and feckless to buy during that toxic time, I did have a few friends that went into serious 'negative equity'.

A mate bought a tiny 1 bed 1 bath near Lewisham hospital for an astounding 60K. About a year into the mortgage his interest rate soared to 15% for about 6 months, almost wiping him out.
Suddenly the whole thing unravelled and it was only worth about 35K. He ended up staying in it another 10 years before he started making inroads into the principal again.
He even considered renting out the bedroom - and this is a minute - maybe 600sq ft - apartment, to help with the payments, but fortunately the interest rates fell again from double digits, and he was able - just - to pay the mortgage again. Albeit he was till 'underwater' for many years afterwards.

Fortunately, he had bought wisely - in that the place was the right size and the right location for his long-term needs, so wasn't left holding an 'albatross' while he had to find somewhere else.

Submitted by ctlmdjb on September 16, 2006 - 9:44am.

Nice to see there are some other Brits on the site!

The point I was trying to make is that less desirable properties get wacked hardest. Mine was in a poor location (BR station but no tube, BR station only ran to the city - 3 miles down the road in Brixton you are on the Victoria line), it was an appartment (bad) it was one bedroom (bad), it was on a busy road (bad), it had no garden (in England very bad), it faced North (bad). As the market goes down buyers still have about the same amount of money to spend - they just buy nicer places. When I did list it we were into the next upswing and I had 2 buyers in a week - 'cause it was all they could afford. It also had some really toxic legal issues to do with the building being owned by one party and the appartments being actually on a 99 year lease. Meant all the common areas needed maintenance but all 5 leasees had to agree and pay for them....which never happened. The buyers didn't care all of a sudden - we were into the next upturn.
So condo conversions in Lemon Grove WILL sell. Sometime in 2012.

Submitted by sdcellar on September 16, 2006 - 11:56am.

As the market goes down buyers still have about the same amount of money to spend - they just buy nicer places.

See, right in the middle of the post, not even trying to make the point. This is why the median holds up.

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