London 1988 – San Diego 2006

[ctlmdjb]

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…

[(former)FormerSanDiegan]

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 ?

[ctlmdjb]

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.

[VCJIM]

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.

[sdrealtor]

Looks like you sold too soon

[(former)FormerSanDiegan]

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

[ctlmdjb]

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.

[lindismith]

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….

[(former)FormerSanDiegan]

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.

[mydogsarelazy]

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

[ctlmdjb]

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.

[Anonymous]

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.

[lendingbubblecontinues]

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.

[PerryChase]

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

[VCJIM]

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.

[Author]

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