House Price Inflation/Income/Old Age

angrypirate

Currently interest rates are at their all time low, there is a stamp duty holiday for ftbs buying properties <250k and house prices are just about maintaining steady (they may show 9% up on the year, but they are 8.1% down on prices 2 years ago)
When interest rates go up in the near future, there will be a flood of properties coming onto the market from distressed vendors (not necessarily in NE and not necessarily those being repo'ed, but more those struggling with their monthly repayments). There will also be an increase in repo'ed coming up for auctions. I believe then we'll see the true meaning of "Price Elasticity of Demand".
And those who dont think interest rates need to go up are probably those who believe that Gordon is our saviour and that the recession has ended. You are probably also the people who think that "its different this time".

Pobby

Hahahaha. How many times did I hear " it`s different this time " ? Big multiples, ltv, little wage inflation, liar loans, huge increase in btl. Sure is different.

Linton

An alternative prediction:

Interest rates will go up to "normal" levels. There will be some increase in repossessions but not a lot because only comparatively few people have been able to get mortgages recently and so be dependent on the low interest rates. Most people with mortgages took them on whilst the interest rates were normal.

When interest rates go up the lenders will be happier to lend and so will decrease the required deposit. More people will be able to get mortgages leading to increased demand. House prices will go up.

Place your bets here!!

angrypirate

Agreed Pobby. Sure its different.
This is no ordinary boom and bust
This is a labour boom and bust. A super boom, and we are in for a super bust. £200bn printed, a budget deficit of nearly 167bn, government borrowing has increased to nearly £850bn as of 18th Feb this year, and the UK is only just scraping out of recession.

Bear in mind the following

GDP = Consumer spending + Investment made by industry + excess of exports over imports + government spending

Does anyone think that maybe the only reason why we appear to be out of a recession is that government spending is SO HIGH? With a General Election coming, being able to say that labour have single handedly brought the UK out of a recession might just be an election spinner? Yes, Labour have singlehandedly brought the UK out of recession, but the key work is singlehanded - only by the government spending so much. The private sector, where all the money in this country is made, is still well in recession

Pobby

Tbh, angrypirate, I cannot for the life of me see why any of the parties want to get into power. Who ever it is won`t be popular when the real cuts have to come into force.

Still one good thing. At least we don`t have to put up with the airways clogged with property !!!!!!.

CLAPTON

well

lets assume a person spends H on housing
and N on non housing costs
their income is therefore H+N (after taxes )

now lets assume that real increase in income over inflation is r % per annum

so afer one year their income is now (H+N) x (1+r)
after two years there income is (H+N) x (1+r) x (1+r)

... after n years their income is (H+N) x (1+r)^n

Now if they are content to only maintain their non housing standard of living i.e. in real terms only spend N very year then the amount of money available for Housing goes up

as ((H+N) x (1+r) ^ n) - N

so some example
lets say real rate of wages increases is 2.5% pa
and
lets say they earn 30,000 and spend 10,000 pa on housing and 20k on other

after 1 year they will have have an extra 750 pa to spend on housing which is an increas on the housing element of 7.5%

after ten years they will have 8,402 pa to spend which is an increase in the housing element of 93%


so if people choose to use all of their increase in real incomes on housing (or even a large proportion) then house prices can indeed rise indefinitely at a faster rate than earning.

Obviously there are other factrors; credit availability, population growth in relation to house building etc

angrypirate

CLAPTON wrote: »

well

lets assume a person spends H on housing
and N on non housing costs
their income is therefore H+N (after taxes )

now lets assume that real increase in income over inflation is r % per annum

so afer one year their income is now (H+N) x (1+r)
after two years there income is (H+N) x (1+r) x (1+r)

... after n years their income is (H+N) x (1+r)^n

Now if they are content to only maintain their non housing standard of living i.e. in real terms only spend N very year then the amount of money available for Housing goes up

as ((H+N) x (1+r) ^ n) - N

so some example
lets say real rate of wages increases is 2.5% pa
and
lets say they earn 30,000 and spend 10,000 pa on housing and 20k on other

after 1 year they will have have an extra 750 pa to spend on housing which is an increas on the housing element of 7.5%

after ten years they will have 8,402 pa to spend which is an increase in the housing element of 93%


so if people choose to use all of their increase in real incomes on housing (or even a large proportion) then house prices can indeed rise indefinitely at a faster rate than earning.

Obviously there are other factrors; credit availability, population growth in relation to house building etc

But dont forget with inflation at 2.5% they have to spend en extra £500 on top of the 20k for other. So they only have an extra £250 to spend on housing, which is, er, 2.5% of £1000. DUH

Ok, lets try again. We'll make things more realistic for today - say their wage inflation is 0% (unless they work in the public sector?). Other spending inflation is at 3% (todays CPI). So according to your maths, they now they have £600 less to spend on housing, so HPI is now running negatively at , err, 600 / 10000 = 6%...

CLAPTON

angrypirate wrote: »

But dont forget with inflation at 2.5% they have to spend en extra £500 on top of the 20k for other. So they only have an extra £250 to spend on housing, which is, er, 2.5% of £1000. DUH

Ok, lets try again. We'll make things more realistic for today - say their wage inflation is 0% (unless they work in the public sector?). Other spending inflation is at 3% (todays CPI). So according to your maths, they now they have £600 less to spend on housing, so HPI is now running negatively at , err, 600 / 10000 = 6%...

My post was a response to the opt quoted view that house prices can't keep increasing in the long term above inflation.

If you don't want to increase your understanding of the situation then that's fine; if you do then reread my post.

princeofpounds

What I'm having trouble comprehending is how prices can continue going up at such a rate, especially bearing in mind that incomes are not rising in line with this. I work for a major PLC who have frozen pay for the last two years, and intend doing so this year too.

You don't (generally) buy a property with a salary. You buy it with a mortgage, which you service with a salary. This introduces another variable into the equation, which is the availability and cost of credit. House prices have managed to stage some recovery only because interest rates were slashed to unprecedented levels. Whether this is a sustainable situation remains to be seen. I think not, but I don't want to get into the argument right now.

Most of the variation in house pricing around the long term trend is accounted for by changes in credit conditions.

I can understand that this will not affect the mobility of people who have significant amounts of equity in their homes, but for younger people with less equity in their homes, moving up from a starter to a family home must be incredibly difficult.

Exceptionally difficult. What happens can be seen from Japan, which had its own (even more insane) property boom a couple of decades ago. You end up with a 'lost generation' who find it very hard to raise kids or build any personal wealth.

I am also at a loss as to what will happen to people when they reach old age and can no longer work. Who will pay the rent for the property they rent?

This is where things get a bit more interesting. The funny thing about intergenerational inequity is that it has a method of ironing out a lot of issues - death. Of course some of the wealth of the parental generation will be consumed in healthcare, but most will be recycled either through economic activity in those areas they spend their money (healthcare again) or through inheritance and estate taxation. The lost generation may well find that as they move into late middle age they can suddenly afford more than they ever thought as the previous generation liquidates its property wealth and finds few buyers with comparable resources of paper equity.

Obviously this doesn't help when you want to bring up a young family now, but it's better than nothing.

What is a more inequitable problem is the pension situation, particularly public and private defined-benefit pensions. This is because the previous generation have used the ability to shift the exposure onto subsequent contributors into programs (and for most public pensions, that just means the taxpayer) to make themselves huge promises which the younger generation will have to pay (or renege upon).

This is different to housing because at least in housing the older generation have taken on both the asset and the liability, but in the case of pensions they have awarded themselves the asset of high defined payments but not the liability of having to contribute sufficiently to afford those payments.

It's analogous to a father taking money from a loan shark and saying 'don't worry, my son will pay you back'.

Generali

CLAPTON wrote: »

well

lets assume a person spends H on housing
and N on non housing costs
their income is therefore H+N (after taxes )

now lets assume that real increase in income over inflation is r % per annum

so afer one year their income is now (H+N) x (1+r)
after two years there income is (H+N) x (1+r) x (1+r)

... after n years their income is (H+N) x (1+r)^n

Now if they are content to only maintain their non housing standard of living i.e. in real terms only spend N very year then the amount of money available for Housing goes up

as ((H+N) x (1+r) ^ n) - N

so some example
lets say real rate of wages increases is 2.5% pa
and
lets say they earn 30,000 and spend 10,000 pa on housing and 20k on other

after 1 year they will have have an extra 750 pa to spend on housing which is an increas on the housing element of 7.5%

after ten years they will have 8,402 pa to spend which is an increase in the housing element of 93%


so if people choose to use all of their increase in real incomes on housing (or even a large proportion) then house prices can indeed rise indefinitely at a faster rate than earning.

Obviously there are other factrors; credit availability, population growth in relation to house building etc

Please correct me if I'm wrong but mathematically isn't your argument the same as the idea that you can never be hit by an arrow fired directly at you.

The reason?

After a period of time, the arrow is half way towards you from the point of the archer. After another period the arrow has halved the remaining distance.

However, the distance remaining can always be halved so the arrow will always have half of a distance until it gets to you.

By the logic you have, AIUI at least, the cash already in the housing market can continue to be leveraged indefinitely so that house prices can continue to rise by ever decreasing fractions of pennies.