Would affordability really be any different if house prices dropped?

fc123

the_ash_and_the_oak wrote: »

Agree w the original poster on this thread. The assumption that falling prices would mean increased affordability is flawed imo. Either houses are cheap but the money to borrow for them is expensive, or houses are expensive because the money to borrow for them is cheap - the irony is that it is when houses are expensive that more people buy them

It's late and I have skated over this thread a bit....but sums it for me.

I skated the Fred Harrison book too but one thing rang in my ears......he said that the economics of land values went as such....if something went down in price...always would be land (and whatever is built on it whether house or commercial) that , eventually, mopped up the surplus.

Old ordinary Joe wouldn't benefit long term...perhaps for a brief period inbetween...and any gains (whether from low interest rates or costs of manufacture in the case of shops) just get gobbled up in higher land/property costs.

Seems true to me.

Our house, many years ago, cost 60k..the monthly mortgage payments were higher and it cost a fortune to put anything in the dam house..in real terms. A fridge freezer cost more in £££ (forget inflation) in 1992 than it does to today. The sofa we saved for over 2 years was a small fortune at the time...and came from The Co op. £700 I think. Loads of £££ at the time.

Same house now? Probably just as much of a struggle for an FTB to fund today...but I bet they have more ''stuff' in it.

the_ash_and_the_oak

Could make a similar argument about taxation? (as it goes down?)

IveSeenTheLight

Thrugelmir wrote: »

Originally Posted by mbga9pgf
Higher IRs = Higher inflation which usually = which isn't going to be matched by higher wage inflation therefore no debt erosion .

Unlike previous recessions this is going to be a difficult period.

Don't discount anything Thrugelmir

Thrugelmir wrote: »

I'm not discounting anything.

carolt

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?

It's stating the obvious that affordability is better if prices are lower.

Your assumption that it might become less affordable over time is based on the assumption that interest rates will rise from their current levels over the life of the mortgage - clearly that will happen.

What worries me is that there are posters on this board pushing the message that affordability is good now because prices are a little bit lower, and base rates are CURRENTLY very low.

It doesn't, of course, take a genius to work out that interest rates will be far higher in the future.

So buy now ONLY if you can get an excellent long-term fixed rate - or a huge chunk off the price.

silvercar

So buy now ONLY if you can get an excellent long-term fixed rate - or a huge chunk off the price.

Or if you can get a really cheap tracker now and will be in a position to massively overpay in the next few years, thus benefitting from lower prices and cheap rates.

the_ash_and_the_oak

carolt wrote: »

It's stating the obvious that affordability is better if prices are lower.

Is it?

Is 200k at 5% more or less affordable than 160k at 7%?

the_ash_and_the_oak

silvercar wrote: »

Or if you can get a really cheap tracker now and will be in a position to massively overpay in the next few years, thus benefitting from lower prices and cheap rates.

Given that trackers seem to be BR+4% is this really a course of action you would recommend? How long are you expecting BR to stay at 0.5%? a year? 2? 3? Not that much room for overpaying and not really for that long imo

silvercar

silvercar wrote: »

Or if you can get a really cheap tracker now and will be in a position to massively overpay in the next few years, thus benefitting from lower prices and cheap rates.

the_ash_and_the_oak wrote: »

Given that trackers seem to be BR+4% is this really a course of action you would recommend? How long are you expecting BR to stay at 0.5%? a year? 2? 3? Not that much room for overpaying and not really for that long imo

I said if you can get a really cheap tracker.....

BR+ 4% is not really cheap IMO.

If you can get one, say from porting an existing mortgage, then you do have the opportunity to overpay big time.

the_ash_and_the_oak

silvercar wrote: »

I said if you can get a really cheap tracker.....

BR+ 4% is not really cheap IMO.

If you can get one, say from porting an existing mortgage, then you do have the opportunity to overpay big time.

Oh, yes i see - for existing owners this could well be possible!

Thrugelmir

carolt wrote: »

What worries me is that there are posters on this board pushing the message that affordability is good now because prices are a little bit lower, and base rates are CURRENTLY very low.

Yes it is. Over 25 years it is cheaper to borrow and repay £150,000 at 4% rather than £130,000 at 6%.

What matters is the total cost of borrowing over the longer term, not singularly house prices or interest rates.