Would affordability really be any different if house prices dropped?

phil_b_2

Many claim that impending interest rate rises will bring on a second dip, and I agree that for prices to crash or even go down by any significant amount rates will have to rise a lot.

The problem is that as rates go up, borrowing money to buy those cheaper houses will cost the same or more. Since most people need a large mortgage they still won't be any better off with cheaper houses.

My numbers here could be totally wrong, so feel free to correct.
Lets say we can now get a rate of 5%. On interest only, borrowing 100k for a house would be approx £416 per month.
Now lets say prices have dropped 20% and that house is only £80k. Great! But for that to have happened rates have gone up to 7%. Borrowing that 80k on interest only would be £466 per month - £50 more expensive.

I'm probably missing something obvious but that possibly makes buying more expensive if house prices drop unless you have a huge deposit, based on the assumption low rates are keeping prices propped up?

Cannon_Fodder

One thing that comes to mind, is that your deposit becomes a larger proportion of the total price, so with an improved LTV you should get a better rate. (Maybe not on the example given, but generally)

Whether enough to make up for the IR difference, would depend on personal circumstances/lender deals/luck etc.

sjaypink

phil_b wrote: »

Many claim that impending interest rate rises will bring on a second dip, and I agree that for prices to crash or even go down by any significant amount rates will have to rise a lot.

The problem is that as rates go up, borrowing money to buy those cheaper houses will cost the same or more. Since most people need a large mortgage they still won't be any better off with cheaper houses.

My numbers here could be totally wrong, so feel free to correct.
Lets say we can now get a rate of 5%. On interest only, borrowing 100k for a house would be approx £416 per month.
Now lets say prices have dropped 20% and that house is only £80k. Great! But for that to have happened rates have gone up to 7%. Borrowing that 80k on interest only would be £466 per month - £50 more expensive.

I'm probably missing something obvious but that possibly makes buying more expensive if house prices drop unless you have a huge deposit, based on the assumption low rates are keeping prices propped up?

Maybe initially- but rates would most likely go down again- so still much cheaper over the course of the mortgage?

IveSeenTheLight

phil_b wrote: »

Many claim that impending interest rate rises will bring on a second dip, and I agree that for prices to crash or even go down by any significant amount rates will have to rise a lot.

The problem is that as rates go up, borrowing money to buy those cheaper houses will cost the same or more. Since most people need a large mortgage they still won't be any better off with cheaper houses.

My numbers here could be totally wrong, so feel free to correct.
Lets say we can now get a rate of 5%. On interest only, borrowing 100k for a house would be approx £416 per month.
Now lets say prices have dropped 20% and that house is only £80k. Great! But for that to have happened rates have gone up to 7%. Borrowing that 80k on interest only would be £466 per month - £50 more expensive.

I'm probably missing something obvious but that possibly makes buying more expensive if house prices drop unless you have a huge deposit, based on the assumption low rates are keeping prices propped up?

The argument would be that the capital is less thus, you have less to pay off along with the fact that rates could lower again.

It's a bit of a risk imo and it would depend on how much you are borrowing.
Some are hoping to save a lot more than just £20k

IveSeenTheLight

sjaypink wrote: »

Maybe initially- but rates would most likely go down again- so still much cheaper over the course of the mortgage?

He only increased the rates by 2%.
2% interest rate rise equates to 20% fall to be equalisied.

When rates rise, when do you expect them to return to current levels?

How many envisage an increase of rates of 2%?
How many envisage a further drop in house prices by 20%?

Cannon_Fodder

On a repayment basis, on the example given, you save £19 a month...

Cannon_Fodder

Only having to fund a repayment vehicle to meet a £20k lower target has to be factored in, on the original example.

sjaypink

IveSeenTheLight wrote: »

He only increased the rates by 2%.
2% interest rate rise equates to 20% fall to be equalisied.

When rates rise, when do you expect them to return to current levels?

How many envisage an increase of rates of 2%?
How many envisage a further drop in house prices by 20%?

I don't know TBH.... all this stuff is not my strongpoint, if you didn't already guess

Take my post as the general sentiment from the [STRIKE]man[/STRIKE] woman on the street then. I know all you lot work out all the figures etc, but, in general, people are a bit thicker than you guys. They feel better if the purchase price goes down, they don't assess the differences between different purchase prices and long term interest rates fluctuations, IMHO

System

The vast majority of people will just look at the monthly cost at the time of buying.

buglawton

A topic with an insightful title!

Supply must balance demand, There is not going to be any large percentage increase in housing any time soon. So, regardless of interest rates and prices, it must be difficult to buy a house, otherwise everyone who wanted one would magically move into one, despite no increase in stock!

In Germany, during he 90s, there was a large and permanent influx of racially German East Europeans/Russians into the cities of Germany.

To cope, totally planned communities of good housing stock (mainly 3 floor high flats) were built in huge quantities, to ensure that rents and prices of high quality housing remained firmly nailed down. And it worked.

Graham_Devon

We are in a funny position at the moment. Mortgages are basically costing the equivalent of a roughly 4% base rate, when it's actually at 0.5%.

A lot of people lean on the thought that as base rates go up, competition will kick in and mortgage rates will fall more in line with historical trends.

I don't think there has ever been a time when the base rate is 5% using the above example, but the mortgage rate is 8-10.5% as it would be now if the new product mortgage rates followed the base rate upwards.

Therefore, personally, if base rates went up, I would imagine we would see over time, falling house prices, and pretty stagnant mortgage costs, therefore, overall, not costing more in mortgage interest repayments.