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This month we are recommending "The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream" in which John Wasik exposes the untold truths about home ownership.
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The Essentials Summary

The Essentials Summary

1. Essential Advice
The property market is at an important juncture. How do you decide what path to take when making the biggest financial decision of your life? My advice is to think simple and consider the "Big Picture".

2. The Housing Market, Plain & Simple
A house is only worth what a buyer is able to pay for it, which principally depends on the amount of money that buyer can borrow. If banks decided to lend 40x salary the average house price would be pushed towards £1 million. If they instead decided to stop lending altogether, house prices would plummet as buyers would no longer have access to enough money. Here's how the house price crash unfolds...

3. Money Supply
Money supply is the amount of money in circulation at any given time. Historically the supply of money was kept stable by backing it with a store of value - gold. This system ended in 1973 and nowadays money is just a piece of paper. Unfortunately, governments own printing presses and have the inclination to print huge sums of paper money to satisfy their spending needs. Consequently, the supply of money has increased dramatically over the last 30 years.

4. The Growth of Money Supply
As the exponential increase in the supply of paper money fed into the banking system, it lead to similarly exponential increase in the availability of credit. Banks were awash with money and could lend that money easily. Meanwhile, borrowers became increasingly happy to take on larger and larger loans as the economic boom continued. A feedback loop was created in which banks were happy to lend to home buyers, who took the money and chased up house prices, which made their homes more valuable, and made it easier for banks to lend them even more money.

5. Cycles
That's great during boom time, but the economy is cyclical. Once the economy starts to turn downwards, people lose their jobs and start to default on their loan payments. This causes the banks to become more conservative, curbing their lending activity and reducing the availability of credit. This has a devastating impact on house prices. In order to understand why we must first examine the current position ...

6. The Story so Far
The increase in the supply of money led to a flood of credit which has in turn fed into property prices. Recently buyers have been willing to take on huge loans in order to buy the house of their dreams. The steep price rises which followed led to hysteria in the housing market. Buyers felt compelled to jump on the bandwagon before the property horse bolted, becoming so obsessed with owning property that they did not stop borrowing and buying even when house prices were pushed to astronomic levels - they just settled for smaller properites like flats. As a result, house prices are currently around double their true values based on tried and tested, traditional lending multiples and investor valuations.

7. What Happens Next?
The economy is faltering and banks are becoming more defensive. Low cost borrowing is disappearing and banks are agressively curbing their lending activities in order to protect themselves from defaults and debt write-downs. The pipeline which flooded the world with credit was suddenly turned off. A shortage of credit now exists in which buyers no longer have access to enough money to buy high priced property. House prices, which have increased hand in hand with the rising tide of credit, no longer have the means to rise. As the level of credit falls so too will house prices, until they realign with the new, lower level of funding available to buyers. This is likely to be 50% below the current levels.

8. Conclusion
"A pin lies in wait for every bubble, and when the two eventually meet, a new wave of investors learn some very old lessons”. Warren Buffett.

People have forgotten that the economy is cyclical. They have forgotten that markets, including the property market, is cyclical. The recent boom has carried property prices to giddy heights but as the economy turns and jobs are lost, loan payments will be missed, houses will be repossesed and credit will disappear. Few of us have taken out a mortgage small enough to be manageable if interest rates double or if jobs are lost. In addition, the flood of credit brought us 0% credit cards and we have spent accordingly. The time has come to pay back all of our debts, which wont be a pretty sight. Wherever you look it is difficult to see where the support for high house prices will come from. The outcome which is virtually certain is a significant fall in house prices - a house price crash! A 50% fall in the average house price will be a lucky escape, the unfolding credit crisis will probably lead to much worse correction. In light of these facts now is the time to take a long, hard look at your situation, consider your options and prepare yourself for the difficult times ahead.

9. Excellent News
There is a shining gold lining to every disaster of course! For many of you the house price crash is the start of a very profitable future. Which Way Home was set up to guide you through the turmoil. Each month the Latest Market Outlook section will act as your guide to the market, highlighting the key trends which lay ahead. It will also indicate when its safe to start buying property again, so keep watching this space! In the meantime the Resources section tells you how to protect yourself from the impact of the house price crash and how to maintain your current wealth so that you can capitalise on opportunities in the years ahead.

Read on, I hope you find it useful...

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