The last House Price Crash...

Generali

Heyman wrote: »

So definitely worse than the late 80s situation but the question is, what will that translate into? Bigger house price drops? A more protracted period of decline? A re-think of the entire way in which Mortgage deals are made up?

My view is that there will be bigger house price drops and a more protracted period of decline because we have a serious banking crisis at the same time as a deflating bubble: there just isn't the money available to prop up house prices and the longer houses go on not selling, the more highly motivated and distressed sellers there will be.

Heyman wrote: »

I read something else recently about BTL-ers, apparently there are 1m of them now compared to 30 thousand in 1990!!! Will the majority of them sell up (or try to sell up) at knock-down prices though? With sitting tenants? Surely they'd be in for a much bigger loss than if they just sat tight?

BTL is the great unponderable. Will they sell or will they sit tight? My feeling is that we will see many sellers in about a year when it becomes clear that this isn't just a little short-term difficulty. I have no way of knowing though and that's little better than a guess.

GDB2222

Chris2685 wrote: »

Interesting to note that the same excel file shows 'mortgage repayments as a percentage of income'.
That was much higher in the late 80's/early 90's than it was even at the peak of this one... Maybe it's not so bad afterall?

This is a very good point, Chris, and it's one of the arguments that fueled the boom in the first place. There are a few points to consider, though:

1. I don't know how HBOS calculated those figures - they show about 25% of pay for mortgage repayments as a percentage of income. For someone with a mortgage of 6 x salary, paying interest at 7%, the interest is 42% of salary. Remember, though, that that is 42% of gross salary, so more like 60% of net pay. So, there's something a bit strange about the HBOS figures. Maybe they reflect averages, rather than new buyers?

2. It is possible that the lowish percentages from HBOS reflect some of the low interest mortgage deals that were around but are now ending. So, some people are seeing their mortgage interest payments increasing by 50% when they move onto the standard rate.

3. The capital on the mortgage still needs to be repaid, so the higher multiples mean higher capital repayments as a %age of earnings.

4. There was more wage inflation in the '88 - '92 period.

5. There seem to be a lot of quite stretched BTL'ers around these days, and their properties may come on the market fairly soon.

What seemed to happen in the previous slump was that people soldiered on to pay their mortgages until some sad calamity happened - sickness, divorce, or redundancy - at which point there just wasn't any more slack in their finances.

Heyman_2

Generali, you make several good points. I'm glad this thread seems to be pretty on-topic so far although in saying that I've almost certainly jinxed it to descend into the usual nonsense.

One thing that struck me - people talk about 50% drops in price over the coming years, but if the banks stick to their current lending criteria in terms of LTV (i.e. generally 75%) then it will still be tremendously difficult for FTBs to buy. For example, to buy a property valued at 100,000 , a FTB will still have to raise £25,000 in addition to all the usual fees etc etc.

Even a property at £50,000 would mean a deposit of £12,500.

Generali

Heyman wrote: »

Generali, you make several good points. I'm glad this thread seems to be pretty on-topic so far although in saying that I've almost certainly jinxed it to descend into the usual nonsense.

I'm sure it's only a matter of time before it descends into chaotic name calling and paranoia. The pubs have been open for hours now.

Heyman wrote: »

One thing that struck me - people talk about 50% drops in price over the coming years, but if the banks stick to their current lending criteria in terms of LTV (i.e. generally 75%) then it will still be tremendously difficult for FTBs to buy. For example, to buy a property valued at 100,000 , a FTB will still have to raise £25,000 in addition to all the usual fees etc etc.

Even a property at £50,000 would mean a deposit of £12,500.

Well this is the problem. Last time around, the market stabilised once job losses stopped and interest rates stabilised once we came out of the ERM. This time job losses have barely started and interest rates don't have that far that they can fall as they're really not that high anyway.

The other point a lot of people miss is that the baby boomers are just starting to retire or at least to have a look at retiring soon. That's a massive source of supply as you've got a lot of people that bought family homes in the 60s and 70s for buttons (in today's money) that might well be looking to realise a bit of capital by moving into something a bit small and also easier to maintain. They can also afford to undercut almost anyone with a mortgage or who is looking to buy somewhere the same or of a larger size and thus they could keep a relentless downward pressure or at least a cap on prices.

kennyboy66_2

Generali wrote: »

BTL is the great unponderable. Will they sell or will they sit tight? My feeling is that we will see many sellers in about a year when it becomes clear that this isn't just a little short-term difficulty. I have no way of knowing though and that's little better than a guess.

You can then split down BTL into those who have 2/3 bed terraced house or multiple occupany lets in decent areas where rents may be stable and you get fewer voids, where investors may sit it out. If you are more than covering your mortgage, a combination of the costs of selling, inertia, and a mindset that will think property will recover in the long term may outweigh the rational response which would be to sell now before its too late.

Then there are those recent entrants (say last 5 years) who have bought city centre flats at massive prices. Falling capital values and no one to rent to (I'd hate to be a recent graduate looking for that 1st or 2nd graduate level job in the next few years) is going to be a toxic mix. I think this is where we will see most of the forced sales.

Heyman_2

Well this is the problem. Last time around, the market stabilised once job losses stopped and interest rates stabilised once we came out of the ERM. This time job losses have barely started and interest rates don't have that far that they can fall as they're really not that high anyway.

The other point a lot of people miss is that the baby boomers are just starting to retire or at least to have a look at retiring soon. That's a massive source of supply as you've got a lot of people that bought family homes in the 60s and 70s for buttons (in today's money) that might well be looking to realise a bit of capital by moving into something a bit small and also easier to maintain. They can also afford to undercut almost anyone with a mortgage or who is looking to buy somewhere the same or of a larger size and thus they could keep a relentless downward pressure or at least a cap on prices.

Ah the ERM - what a great idea that was, and what a shambles it turned into. On it's own, was it not the catalyst for the late 80s bust?

That's a good point you make about older people - my parents were toying with selling up a couple of years ago, having bought the place back in the 70s. A short chat with them about it made me realise that they have no idea how much it would be worth in today's (well, yesterday's) market, and would probably gladly accept about half the 'real' value.

Then there are those recent entrants (say last 5 years) who have bought city centre flats at massive prices. Falling capital values and no one to rent to (I'd hate to be a recent graduate looking for that 1st or 2nd graduate level job in the next few years) is going to be a toxic mix. I think this is where we will see most of the forced sales.

I wonder how many BTLers actually did that i.e. bought the city centre flats to rent out? And surely they'll almost always be demand for rented, city centre property? I would have expected this to more apply to BTLers in other locations with less prospects for renting.

dopester

IveSeenTheLight wrote: »

It's factual info that you can choose to look at or ignore.
You choose.

All the facts you cling to are going in to reverse miladdo.

MrDT

Heyman wrote: »

For example, to buy a property valued at 100,000 , a FTB will still have to raise £25,000 in addition to all the usual fees etc etc.

Even a property at £50,000 would mean a deposit of £12,500.

These sums don't seem unreasonable to me. The figures stack up even as a single person on average wage - say you want a 100k house, save up 25k and get a 75k (3x salary) mortgage. Sounds responsible and achievable enough. Even easier if there's two of you and no kids etc.

If *average* prices dropped to 100k then you can bank on there being lots of properties available for way less. If you earn below average, buy below average, or save up for longer. If you earn above average, buy above average if you're that way inclined, or get a smaller mortgage and get it paid down quicksticks.

Saving a 25% deposit suggests to me that you're financially responsible enough to take on a mortgage. That was the problem with 100%+ mortgages being dished out to any old chav, they generally didn't understand what the commitment they were taking on really meant.

ad9898_3

My opinion is that things seem much worse than last time, I was only young then but things seemed to roll downhill last time, where as now, it feels like things have fallen off a cliff.

One thing that was nowhere near as bad last time was personal debt. I think this skews everything, take a look at the "debt boards" on this site, some peoples mortgage payments only make up for half of their total debt payments!!

Last time there was no 0% credit cards, no Ocean Finance etc.. being advertised night and day on TV, no 12k loans that could be picked up by anyone who had a job for a 6% interest rate.

These issues are going to really hurt people this time.

Nenen

In answer to the OP...We saw a 30 - 35% drop on the price of houses in our area (we were living in Suffolk at the time) in the last HPC but it certainly feels worse now (especially the way it is being portrayed in the media) and the link to global economy, which I don't remember being the case last time, makes things feel even worse too.

The thing that strikes me reading mails about mortgage payments to monthly earnings ratio is that our expected standard of living is very different now. Many people have very different expectations about what they 'need' now compared to 1989 and that this will make a difference to how much they feel the pinch when mortgage payments are higher. For example, I know the price of electronic goods has fallen drastically in real terms but many people who are buying their own homes now also expect to be able to afford mobile phones as well as landlines, at least one computer per household member with payments for broadband connections, TVs in every room in the house often with Sky subscriptions on top etc etc. These things just weren't available in 1989!

I despair for many of my children's friends who, in their early twenties, seem to think that having at least one foreign holiday per year is a necessity and have become so used to having everything they want *now*, and with a designer lable on it too, they find it so very hard to economise or wait. I must say that I don't blame them for their attitude... it is my generation that has foisted these unrealistic expectations upon them.