50% rise in house prices needed before crash

meanmachine_2

OK, so I've looked at the whole affordability argument as a reason why the market hasn't crashed. I have to say, it's a pretty strong one.

Now if int rates stay at 4.5%, then houses would have to go up from around 160K to around 240K to hit the same unaffordability as in 1989. That's 50%.

If prices continue to rise @ 10% a year, we'll hit that point in 2010.

Of course, it's unlikely that buyers will voluntarily push prices up that far. In 1989, IRs spiked and homeowners had no choice in the matter.

Also, if IRs go up to, say, 5.5%, that will bring forward this tipping point by about 6-12 months.

Of course, this assumes all other things being equal (low unemployment), and doesn't factor in wage inflation, which will help affordability a little.

So there you go - if HPI is between 0-5% a year, that is sustainable beyond 2010. If it goes above that, then you're going to hit crisis point by 2010.

But of course, anything can happen, which is why predictions aren't worth a damn..

crossleydd42

.......and a lot more happened in the late '80's/early '90's which you haven't mentioned which queered the whole housing pitch, too, at that time.

nelly_2

people can afford houses yeah but at these prices they have to forsake other stuff

personally i'd rather have other stuff.

meanmachine_2

Well that's right.

In 1989 the mortgage took up 80-90% of your take home pay. A recession was inevitable.

If we're going to escape recession again, the politicians had better hope HPI is closer to zero than 10% each year, otherwise it'll all end very nastily.

crossleydd42

If you recall, the first £30,000 of a mortgage attracted tax relief at that time and with two unmarried owners, it was £60,000. In the April budget, Nigel Lawson (?) said that this relief would be withdrawn at the end of September. This caused Tom, !!!!!! and Harry to get in on the act and buy houses before the incentive ran out. This also started the system of shared ownership, it being the final and only way houses could be bought at ven friends were buying houses to get this benefit before it ended. such high prices. Consequently, this also stoked the fires of house inflation. When the recession finally came, and with it redundancy, fingers got burnt, house prices plummetted and negative equity raised its head for the first time.
The chances of all this coming agian are very remote.

MickKnipfler

And inflation was high....that's what wiped out all the negative equity...I smell gas this time!

NSR2

meanmachine wrote:

OK, so I've looked at the whole affordability argument as a reason why the market hasn't crashed. I have to say, it's a pretty strong one.

Now if int rates stay at 4.5%, then houses would have to go up from around 160K to around 240K to hit the same unaffordability as in 1989. That's 50%.
....

Err I've been loking at FTB properties in SW london.
The average income of an FTB needs to be around 50K.

Even the EA I spoke to yesterday told me no FTBs were buying, they simply can't afford it, unless they have an inheritance.

So the FTB property I saw at 170K yesterday will probably remain empty for a while, with the owner continuing to pay the morgage.... Seeing as it's vacant.

At some point they are going to have to reduce the price, and sharply frankly.
In order to get it to sell.

Back in the 80s / 90s affordability was about the Owner / Occupier, and if they could afford their morgage.

Now in the time of BTL, is about how long the owner can stand having no tenants / buyers.

meanmachine_2

Sure, that's a good point. London is well ahead of the game in this mad race to "absolute unaffordability".

I think the average wage is 30K to a 250K property, so yes, the capital could hit 1989 figures in the next 3 years.

Deemy

When people talk about £160k to £260k rise then thats the time you can worry about an housing crash

In a low inflation environment, the debt is not being eroded away by inflation... hence the recession may be shallower than the 1990's one but likely will be more prolonged, but offcourse its not happened yet, and will likely take some external pressures for it to occur

Maybe the Chinease banking system collapse due to bad debts ?

Dollar collapse ?

War with Iran and Oil going $100+ ?

NSR2

meanmachine wrote:

Sure, that's a good point. London is well ahead of the game in this mad race to "absolute unaffordability".

I think the average wage is 30K to a 250K property, so yes, the capital could hit 1989 figures in the next 3 years.

Can you explain how you've been working out "affordability"?

Cheers

meanmachine_2

NSR2 wrote:

Can you explain how you've been working out "affordability"?

Cheers

No I can't, as it's such a slippery term.

In 1989 a repayment mortgage would have gobbled up one income of a two income family, so I'm treating "extreme unaffordability" as anything above 90% of one person's take home pay.

Of course, there are other factors, such as council tax and bills which I'm too lazy to factor in. also, I've no idea what level these will be at in 5 years' time, so i've ignored those.