The sadness/ madness of hpi

Max_Headroom_3

Bluntly, people believed that house prices could be divorced from the incomes that support them.

Or to put it another way, if you give everyone three times as much money to spend on housing, they don't all end up with much nicer houses, they end up with the same houses at three times the price.

A lethal combination of very lax lending, HPI spin (they're not building more land, supply and demand, sound fundementals, look at the last five years, etc etc) and property !!!!!! created a self fulfilling prophesy. The more they went up, the more everyone believed they would continue to do so, banks included.

So we ended up with a ridiculous situation where the banks felt safe (they believed that no matter how much they lent their money was safe as it was secured against a rising asset), people felt safe (well if we get into trouble we can always sell and bank the profit of the house having gone up in the meantime), and people without houses believed (understandably) that no matter how ridiculous the prices seemed, they would be dearer next month.

All the while this situation created a fantastic feel good factor as everyone felt rich which encouraged borrowing and spending) so no one wanted to put the brakes on.

But the whole thing was unsupportable as ultimately it has to be paid for by what the man in the street earns at the end of each week or month (including BTL of course as that is supported by rent, paid for out of the man in the streets wages).

So that's why you (and indeed many of us) couldn't afford your house now. Possibly in another two or three years however, you will be able to again. And a lot of people will be financially burned on the way down, just as many got rich on the way up.

Interesting times ahead...

Realy

Pobby wrote: »

Even in the South East, under 40 miles from London, a decent 3 bed terrace was only £45k 10 years ago. Very affordable on 2 x minimum wage!!!! A friend on mine was telling me that a month or so ago one, which needed a total refurb went for £160k !!!! That was considered cheap.

No wonder the wheels are falling off right now.

Are you sure on that price as it was well below the average?
I purchased a 3 bed semi in the midlands 8 years ago and that was £96K.
Average house price in 1998 was £88K (nationwide)
Here are the HBOS figures for SE. Top figures are 98 figure, below is 08 and the botom figure is %age increase.

South East

1998-Q3

(£)

2008-Q3
(£)
1998 Q3–2008 Q3 Average Annual
% Change

Bungalows

106,997

261,178

144%

Detached

177,009

401,608

127%

Flat & Mais.

56,252

161,049

186%

Semi-Detached

99,530

233,830

135%

Terraced

76,643

198,990

160%

Pobby

I sold a 3 bedroom semi detached house in 1996 in Reading, Berkshire. The property had central heating, garage and fairly large garden. It was built at the end of the 30`s. I can`t remember the actual price but it was around £70,000.

I must admit that I made a mistake regarding the terrace house price . In fact the price of £45k would have been at about 1994 prices.

Totally agree with what Max has posted. It was that feeling of becoming rich because your house had gone up by such a large amount. In fact some people became quite daft because of it. One friend, who shall I say is a bit of a chancer, seemed to delight in the fact that his rather run down terrace house was ``worth £200,000. I think he gave 20 something thousand for it early 80`s. So much so, he was going around giving advice on BTL. Not that he did it himself.

What worries me is the effect this will have on people both who have mortgages and those in the rented sector. Not that I agree that the tax payer should bail out those that are struggling to pay the mortgage but I would like to see some measures that will help people stay in their own homes.

As for the rented sector, and I have little sympathy for BTL landlords who find themselves in trouble, I have every sympathy for their tenants that will be forced to move on.

Gorgeous_George

I moved home in August 1999 and bought a 2 bedroom semi-detached bungalow for £60,500. In 2003 I sold it for £137,500. In November 2006 it sold again for £169,950.

That's an annual increase of 15.9% over the nine years and 22.8% over the four years that I owned it. If it had continued to rise at 22.8% it would cost £383K today. There is one similar property in the same road on RM with an asking at £165K.

Prices rose because the money was borrowable and mortgages were historically cheap and affordable. Immigration added to demand.

Prices are falling because money cannot be borrowed. NOTHING to do with them costing too much.

What amazes is me is that houses cost more when borrowing is cheap. No other commodity is affected in this way. I conclude that FTBers were gullible.

GG

Pobby

Good point GG. 15.9% growth over nine years is quite amazing.

chucky

Max_Headroom wrote: »

Bluntly, people believed that house prices could be divorced from the incomes that support them.

Or to put it another way, if you give everyone three times as much money to spend on housing, they don't all end up with much nicer houses, they end up with the same houses at three times the price.

A lethal combination of very lax lending, HPI spin (they're not building more land, supply and demand, sound fundementals, look at the last five years, etc etc) and property !!!!!! created a self fulfilling prophesy. The more they went up, the more everyone believed they would continue to do so, banks included.

So we ended up with a ridiculous situation where the banks felt safe (they believed that no matter how much they lent their money was safe as it was secured against a rising asset), people felt safe (well if we get into trouble we can always sell and bank the profit of the house having gone up in the meantime), and people without houses believed (understandably) that no matter how ridiculous the prices seemed, they would be dearer next month.

All the while this situation created a fantastic feel good factor as everyone felt rich which encouraged borrowing and spending) so no one wanted to put the brakes on.

But the whole thing was unsupportable as ultimately it has to be paid for by what the man in the street earns at the end of each week or month (including BTL of course as that is supported by rent, paid for out of the man in the streets wages).

So that's why you (and indeed many of us) couldn't afford your house now. Possibly in another two or three years however, you will be able to again. And a lot of people will be financially burned on the way down, just as many got rich on the way up.

Interesting times ahead...

i think that you're exagerating just slightly.

UK HPI has very little to do with the global economic crisis.

Eastern Europe, Iceland, India, the US and many others have very little exposure to the UK housing market.

Gorgeous_George

I admit that I did some work on the property.

A gas fire but no GCH cost me about £1,500 including the stone fireplace. A conservatory that was too hot in summer and too cold in winter. A new roof on the garage and lots of decorating throughout. Spent about £15K altogether I guess.

If prices had risen at a more sensible 3%, these houses would cost about £80K - £90K so a 40% - 50% fall should be expected. I think these particular bungalows may fall by just 25%.

GG

ad44downey

Gorgeous_George wrote: »

Prices are falling because money cannot be borrowed. NOTHING to do with them costing too much.

There's a significant proportion of the population that will borrow as much money as is offered to them. And couldn't care less if they're unable to pay it back. Hopefully the days of lax lending are over.

GDB2222

ad44downey wrote: »

There's a significant proportion of the population that will borrow as much money as is offered to them. And couldn't care less if they're unable to pay it back. Hopefully the days of lax lending are over.

That's certainly how the market worked.

We have X
We are able to borrow Y
So our budget to spend on a house is X+Y

smartn

It is interesting to note that stock market prices are now back at 1996 levels. If houses were to fall to the equivalent..... In reality they wont fall back that far but they still have some way to go from where they are now.