Don’t Quit Your Day Job

If you’re a long-time PROFIT CONFIDENTIAL reader, I’m sure you are familiar with Michael’s “bicycle taxi driver” story from about a year ago. For new readers or those who need a little reminder, let me share it with you, in Michael’s own words:

“In particular, I remember one bicycle taxi driver who lectured me on London real estate. While the young man boasted that London property prices could only rise, I responded with, ‘What happens if prices stop rising?’ Having just gotten into the heated London real estate market himself, he responded with, ‘Property prices here go up a minimum of 8% a year.”

After reading Rightmove’s (the UK’s “largest monthly sample of residential property prices”) most recent House Price Index, dated August 15, 2005, I can’t help but wonder what Michael’s taxi driver is thinking about his real estate investment today.

For argument’s sake, let’s say the young man purchased his home at the average sale price of £196,114 (about US$354,967) about 13 months ago. If real estate prices went up 8%, as the bike taxi driver estimated, his property would now be worth £211,803 (about US$383,363), representing a tidy profit.

Of course, real estate prices in the UK did not go up by 8%. The average home selling for £196,114 a year ago is now selling for £196,198 — yielding a profit of only £84 or US$152!

Over the past two months, in fact, the average asking price in the UK has dropped by 1.2% — Could you imagine? You bought a house in June and now it’s worth less than what you paid! Yikes!

And not only are asking prices down, but actual sales are down too — the number of transactions closed in the UK this year between April and June dropped by a whopping 28% year over year. The Land Registry reports that this figure is at its lowest level in the past seven years. The average property is also taking longer to sell, and real estate branches have even stopped signing on new clients who want to overprice their properties to try to limit some of the oversupply in the market.

While it’s too soon to see if the Bank of England’s recent quarter-point rate cut will have any effect on strengthening the UK’s declining real estate market — I highly doubt this trend will improve, as I mentioned last week. The quarter point rate cut equates to about $25 off the average monthly mortgage payment, so it’s just not going to spur people into buying property they can’t afford anyway.

I’m curious to see what unfolds in this story in the months ahead, as I’m sure what we’re seeing in the UK today will be repeated here in North America sooner rather than later. With the environment that’s created when you increase interest rates, consumers can’t help but feel the pinch — and the real estate market, not to mention the economy as a whole, will suffer as a result.

As for the bicycle taxi driver, I sure hope he didn’t quit his day job. The bike taxi business has to be more profitable than UK real estate is these days!