The sadness/ madness of hpi

Incisor

Gorgeous_George wrote: »

... 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.

It is fairly easily explained. People translate a house price into an amount to borrow into a monthly repayment. Then the market applies an overall ranking and averaging effect across all buyers and all houses, with the effect that mortgage repayments tend to a proportion of take home pay. If interest rates are low, then loans can be higher to give the same monthly repayment.

To some extent it is gullibility on the part of FTB's. They don't relate to concepts like "I have to pay back £125,000 over 20 years and the capital repayment is £x and the interest is £y in year n"". For them it is all about monthly income and outgoings. Witness the FTB's we warn about shared ownership: "The monthly repayments at £X will be less than our rent of £Y".

Entertainer

smartn wrote: »

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.

But they are still above where they were in 2003. It's a five year low not a 12 year low - big difference.

This housing bubble is down to the availability of cheap credit. Ironically this has not been pricked by the usual events of inflation leading to higher central bank interest rates but a banking crisis with less credit available. No one really saw that coming.

Fair value in housing is really a combination of earnings and affordability (i.e interest rates). I'm not sure anyone has come up with a definitive model to combine the two (with the inevitable overshoot of the trends that usually occurs.) Maybe it would have been nice if our great politicians had put their minds to that over the last ten years instead of making all their tired speeches about how wonderful they were:

http://uk.youtube.com/watch?v=OU_fzCpwrNc&feature=related

Max_Headroom_3

chucky wrote: »

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.

It happened in the UK, it happened in the USA, it happened in Northern Ireland, and it happened in various European countries too.

The reason it went on to affect other unrelated countries was the way that debt was packaged up and sold as "investments" (this is also what allowed the party to go on as long as it did, as even when banks should have been getting worried at just how much they were lending on houses, they weren't because they were simply selling the debt on. Someone elses problem).

And eventually all of our problem...

Gorgeous_George

... and of course, if prices are rising by 10% per year, the more it costs in the first place, the more you make.

D'oh!

GG

smartn

Entertainer wrote: »

But they are still above where they were in 2003. It's a five year low not a 12 year low - big difference.

I'm afraid it's not a big difference... if the FTSE drops by another 10% or so from this weeks lows, it will be at a 12 year low....

North_Sea_Bubble

Incisor wrote: »

To some extent it is gullibility on the part of FTB's. They don't relate to concepts like "I have to pay back £125,000 over 20 years and the capital repayment is £x and the interest is £y in year n"". For them it is all about monthly income and outgoings. Witness the FTB's we warn about shared ownership: "The monthly repayments at £X will be less than our rent of £Y".

Yes, when finance is used to buy a car, a breakdown of list price, interest paid over the full period of the loan and the resulting actual price must be shown. If the same credit law applied to houses, it might make people think a little more about the debt they were actually taking on rather than simply over extending themselves with the highest monthly amount that they can 'afford'.

dopester

GDB2222 wrote: »

In summer 2006, I was chatting to a local man in Norfolk that I have known most of my life but I only see about once a year. A very decent, sensible man. He was telling me about how his daughter and son-in-law were in the process of buying a bigger house "before the prices rise even further". I said rather innocently that I thought that prices were too high and would probably fall. He thought about it for 2 or 3 seconds and said, "No, I don't think so. They really need to buy now, whilst they still can." And that was it. Well, I was the city slicker who was out of touch with house prices locally, surely?

My conclusion from this sample of one is that ordinary folk weren't speculating on house prices rising, they were simply scared that prices would rise out of their reach.

It's a huge shame, and I would have curbed lending if I had been in charge of the country - and no doubt I would have been thoroughly vilified for doing so.

Many a time when I've been encouraged to buy, pitied for not buying, I've answered that I don't want to buy at "the peak". You could see their confusion at trying to process that... "the peak"... like it really was an alien concept to them.

Well Tony and Gordon promised everyone "education education education."

Forget reading any financial books or questioning if 300% HPI over 11 years is too good to be true.

The people who gorged on debt, bought plasma TVs and spent their lives watching X-factor and Corrie are now slowly being educated by the power of the markets. Time to learn. Thank Labour.

chucky

Max_Headroom wrote: »

It happened in the UK, it happened in the USA, it happened in Northern Ireland, and it happened in various European countries too.

The reason it went on to affect other unrelated countries was the way that debt was packaged up and sold as "investments" (this is also what allowed the party to go on as long as it did, as even when banks should have been getting worried at just how much they were lending on houses, they weren't because they were simply selling the debt on. Someone elses problem).

And eventually all of our problem...

here is the thing - it's the type of debt that was packaged, not all debt are the 'investments' that you mentioned. it was the riskier debt that was sold on. the better quality debt went no-where because it was not seen as profitable as there was no risk involved.

the poor quality debt is a small percentage of total mortgage debt - if it is not repaid we have an issue and that money has to be found from somewhere as we all well know now.

that risky mortgage debt was then sold on a number of times in excess of it's value as people were spreading their risk so exposing more firms in more countries.

so when you say HPI is the cause i disagree - it is related to the cause but i believe how this debt was sold on is the bigger issue not the HPI.

Pobby

But I would argue that hpi is bad without selling off naff debt. Think about it. I bought cheaply and was able to pay back the loan .I now how a lot more disposable income than many. Now that money gives me a choice. I can either spend my money in the wider economy or I can save it. So I do a bit of both. Save a lot but also have some spare cash to buy whatever.

I have friends, not always in duel income families, that have to make 13 or 14 thousand a year before tax just to pay the mortgage. In some cases they have to make a lot more. That`s money the butcher, news agent or the local pub won`t see. Wether renting or buying it makes sense that housing is ALWAYS affordable.

North_Sea_Bubble

But surely these securitised SIVs were only devised to allow the HPI to carry on unabeited to fuel the 'economic miracle'/pyramid scheme. So it could be argued that HPI is to blame.