House Price Crash

RHemmings

lisyloo wrote:

The graph above certainly shows that prices have risen but what it doesn't show is interest rates.

What you need is a graph of interest rates superimposed on the house price graph and you will see a correlation (inverse).

House prices were certainly lower in the 80s but people were paying nearly 15% interest rates at some points.
Now you can get a mortgage for below 5%.
The COST of a mortgage is directly related to interest rates so this graph only shows part of the picture.

I have been looking in detail at the housing market for 4 years now (on a daily basis) and whilst I have an understanding of the main issues, I also have an understanding of how complex it is and difficult it is to predict.

As I mentioned before, you can't just say how expensive the initial payments are. High interest rates typically occur in times of high inflation. And then your debt gets eroded very quickly. While the mortgage may be cripping at first, after a few years it's much smaller. If you buy with a lower interest rate, but a higher initial price, then the amount you pay for the property overall is much higher, as your debt does not erode so fast.

I calculated how many "big macs" you could buy if you had a 25 year mortgage paying £1000 per month. I don't buy big macs, so didn't know how much they cost. So I put in the figure 1.89. The first column of the results is the inflation rate per year, the second column is how many big macs you could have bought with the money you spent on the mortgage. The cost of the big mac inflates once per year, by the inflation amount.

Inflation 3, total bought 113876
Inflation 4, total bought 103155
Inflation 5, total bought 93959.6
Inflation 6, total bought 86034
Inflation 7, total bought 79170.4
Inflation 8, total bought 73198.5
Inflation 9, total bought 67978.5
Inflation 10, total bought 63395.2
Inflation 11, total bought 59353.2
Inflation 12, total bought 55773.4
Inflation 13, total bought 52589.7
Inflation 14, total bought 49746.9

As you can see, even though the monthly payments are the same, the actual amount spend buying the house is much smaller in higher inflation environments. So buying in a low inflation high price environment is much, much, more expensive than buying in a lower price, higher interest rate, environment.

RHemmings

lightspeed wrote:

I would like to think that myself and my partner have made a sensible purchase, i know that the house that we have bought was probably worth 70k in 2000 whereas we have paid 150k.

Whether it is sensible depends on what happens to house prices, doesn't it.

The fact is that something is only worth what someone else is willing to pay and for as many people as there are who are adament about waiting for a crash, i bet there are equally (if not more people) who are prepared to pay the current inflated prices (you only have to look at posts on this board).

Clearly there are people prepared to pay the inflated price, but for how much longer. A lot of people are prepared to pay the inflated price because they believe that there is no alternative, or that the price doesn't matter because it will go up anyhow. As you mention later on, sentiment is very important.

I wonder at what point will current house prices become the "norm", etched into peoples minds and perceptions as being the going rate?

I would say that it is now. But that doesn't mean that it won't change.

IMHO, its by no means impossible but i think it will take a catostrophic event/factor to make house prices fall by 50% or even 40%. IR hikes will eat away at those on the edge of affordability but will they increase enough to make a whole scale difference to house prices?

The question is whether there are people buying properties because they believe that prices will go up. If the prices stop going up, then these people will stop buying, and demand will fall. The amount of demand for houses depends not only on the numbers of people who are buying houses because they need them, but also by the numbers of people buying houses as an investment. BTL, flipping, property developing, and the like.

If prices start falling, as they have in some parts of the country, then sentiment will change. Then demand will change as people who thought there was no alternative to buying at current prices taking on crippling levels of debt will decide that it's better to wait for prices to drop further rather than buy now.

I also agree that sentiment is a key factor in house prices but one thing that has been overlooked is the stubborness of the human race. If i saw the value of my property fall by 50% i certainly wouldnt be selling unless it was completely nesscesary. I realise that there are many people who simply couldnt afford to wait out a crash but i do believe that not everyone is as close to the edge like people describe and that there are alot who could bide their time.

This argument comes up quite often. But there are several points that need to be considered. A crash typically doesn't happen all at once. First there's a buyer's market, where there are too many sellers. With too many houses on sale, a lot of them will sit on the market. Eventually some owners may accept offers just a few thousand less than the previous market price. So not a big loss for them. But then if enough of this happens, house prices start going down a bit. That causes more of a buyers market.

You say that you wouldn't sell your house for less than you paid for it. But only a minority of houses in an area typically sell in any year. So if you've decided that you want the top of bubble price for your house, when prices have gone down 10%, then there will be lots of people selling who didn't pay such high prices as you, and therefore are less concerned about selling at prices less than the top of the bubble. If you decide later on that you want to sell your house for more than other people are selling similar properties in the same area, you can guess what will happen.

Then there are people who want to move up. If people want to move up to a better house, and the prices of those houses have gone down, then they might be better off selling their cheaper house at a loss so that they can buy a better house.

Of course there need to be more expensive houses to move up to, and you might l

But the most important thing to look at is the past. There was a massive bubble in 1989/1990. Does that mean that people then didn't sell the overpriced houses they bought for lower prices? No.

I have gone through all of the factors that support a crash occuring and do think that their are some worrying signs, however, there are still people (like myself) who are confident in their financial ability to cope and manage if such a scenario happened. Those that wont cope are probably those who would fold anyway in time, those that have made silly decisions and buy everyhting on credit.

If you can cope, then that's OK for you. But as all the recent publicity, the growing bankruptcy levels, the growing arrears total shows, many people are biting off more than they can chew.

As far as i am concerned, if you cant afford to buy in todays market, then dont, wait and see what happens but remember that a 25% fall now would probably take the price of that house you've been eyeing up down to those unaffordable levels you were moaning about 2 - 3 years ago.

I am not saying that a crash wont happen, i am just saying that the impact may not be as great as everyone is expecting when or if it does occur.

Well, nobody knows exactly what will happen. But when prices get high enough so that it costs no more (IO mortgage + extra costs of ownership) to rent than to buy, then it doesn't matter if prices did only come down a bit. It's still worthwhile.

lightspeed

[/QUOTE]If you can cope, then that's OK for you. But as all the recent publicity, the growing bankruptcy levels, the growing arrears total shows, many people are biting off more than they can chew.[/QUOTE]

IMO, the majority of these people (not all) are irresponsible and would probably end up bankrupt or in arrears even if IR's were at 1%. Its not so much the cost of their debt but the way in which it is managed and/or the way in which they have been educated about it.

Obviously, this constant borrowing cant go on for ever and it must stop somewhere and it is at that point where we can truly measure the full extent of the damage.

All that said, i cant help but feel that we are in a new generation now where people are happy to have unsustainable debt and live with the buy now pay later attitude. This is the sentiment of a new generation, whether it is right or wrong, you agree or disagree it is the way it is. The harder it gets the more they will borrow.

If this continues i can see house prices rising a little more still.

By the way, i dont feel that i have anything to gain or lose by house prices increasing or decreasing (apart from my sanity :rotfl: {if they fell by 50%+:eek: }) because:

A) i have bought a home and not made an investment.
i dont plan on selling for a very long time.

This thread isnt the first of its kind and wont be the last and the funny thing is that at no point will we know the FACTS until they have already been and gone, therefore, as things stand all of these hundred odd posts have been opinion and opinion alone and the OP could have been answered in about 5 posts.;)

What was the original quesion by the way?

PoorDave

lightspeed wrote:

If you can cope, then that's OK for you. But as all the recent publicity, the growing bankruptcy levels, the growing arrears total shows, many people are biting off more than they can chew.

IMO, the majority of these people (not all) are irresponsible and would probably end up bankrupt or in arrears even if IR's were at 1%. Its not so much the cost of their debt but the way in which it is managed and/or the way in which they have been educated about it.

Obviously, this constant borrowing cant go on for ever and it must stop somewhere and it is at that point where we can truly measure the full extent of the damage.

All that said, i cant help but feel that we are in a new generation now where people are happy to have unsustainable debt and live with the buy now pay later attitude. This is the sentiment of a new generation, whether it is right or wrong, you agree or disagree it is the way it is. The harder it gets the more they will borrow.

If this continues i can see house prices rising a little more still.

By the way, i dont feel that i have anything to gain or lose by house prices increasing or decreasing (apart from my sanity :rotfl: {if they fell by 50%+:eek: }) because:

A) i have bought a home and not made an investment.
i dont plan on selling for a very long time.

This thread isnt the first of its kind and wont be the last and the funny thing is that at no point will we know the FACTS until they have already been and gone, therefore, as things stand all of these hundred odd posts have been opinion and opinion alone and the OP could have been answered in about 5 posts.;)

What was the original quesion by the way?

I think the question was "would you all like to have that same house price crash thread again? The one where everybody says similar things to last time, and somewhere the middle it all gets a bit personal"

RHemmings

lightspeed wrote:

IMO, the majority of these people (not all) are irresponsible and would probably end up bankrupt or in arrears even if IR's were at 1%. Its not so much the cost of their debt but the way in which it is managed and/or the way in which they have been educated about it.

I disagree. For many people who think they must get on the housing ladder, taking on crippling levels of debt is the only way to buy. Is there any published evidence of !!!!lessness among people being repossessed. I would expect it to be higher than the general public on average, but nowhere near universal.

Obviously, this constant borrowing cant go on for ever and it must stop somewhere and it is at that point where we can truly measure the full extent of the damage.

All that said, i cant help but feel that we are in a new generation now where people are happy to have unsustainable debt and live with the buy now pay later attitude. This is the sentiment of a new generation, whether it is right or wrong, you agree or disagree it is the way it is. The harder it gets the more they will borrow.

If the debt is unsustainable, which it often is, their happiness will be rather short lived. Which would you say is better? To rent, or to buy with a high risk of repossession. It seems many are going for the latter.

If this continues i can see house prices rising a little more still.

By the way, i dont feel that i have anything to gain or lose by house prices increasing or decreasing (apart from my sanity :rotfl: {if they fell by 50%+:eek: }) because:

A) i have bought a home and not made an investment.
i dont plan on selling for a very long time.

This thread isnt the first of its kind and wont be the last and the funny thing is that at no point will we know the FACTS until they have already been and gone, therefore, as things stand all of these hundred odd posts have been opinion and opinion alone and the OP could have been answered in about 5 posts.;)

What was the original quesion by the way?

We won't know the facts of what happens in a house price crash for quite some time. But people buying houses right now on various salary multiple levels have to make a decision in the here and now. With the information that is available to them now. It is valid in my eyes to discuss whether in the light of available evidence to buy or not to buy is a rational decision for people in various circumstances.

As an analogy, nobody knows when Blair will go. But it's still possible to discuss what the situation might be, how he might go, and who might replace him. You couldn't say that because we don't know the facts we can't say whether Gordon Brown or Martin Lewis is more likely to succeed him as prime minister when Blair goes.

And I prefer that threads like this are around. They give people the chance to see more detail about the beliefs and opinions of people on this forum. So that when someone posts the question "Should I buy a house now", they can understand the points of view we all have, and how they should interpret the answers we give their simpler personal question.

Jim_B_3

lynzpower wrote:

My sdad worked in kitchens at the time and recalls how he used to try and eat there all the time so it cost less on food at home. and that they used fray bentos pie tins as crockery as they didnt have anything else.

Sorry, people jsut wouldnt do that these days would they

Yes, they would. I try to eat as much as I can at work so that I don't have to eat at home, and not only do I have a Fray Bentos pie tin as a bowl, I also use an old pot noodle pot to eat out of.

I've never owned a television or an iPod (I did buy a tape player two years ago, because someone sent me a tape and I had no way to listen to it). The next person who tells me I should buy fewer plasma televisions and iPods is going to get an abusive response.

CB1979_2

yeah but a tape player is a luxury not a neccessity.

the extravagance of some on here, ooooh get's my blood boiling!

Jim_B_3

In my defence, it was a mid-eighties Sony knock-off without headphones.

Don't think I bought the pie tin or pot noodle pot new, by the way. They're very expensive to buy in the supermarket.

AndrewSmith

lynzpower wrote:

i do agree with lisyloo

my parents when I was born in 77 were "fortunate" if you can call it that an auntie died and left them thier first home. Before thast they were living with my grandparents sharing a single bed. My sdad worked in kitchens at the time and recalls how he used to try and eat there all the time so it cost less on food at home. and that they used fray bentos pie tins as crockery as they didnt have anything else.

Sorry, people jsut wouldnt do that these days would they

I have to agree with you here lynz. When I was first born my father was a pig and poultry farmer. We lived in a small farm cottage next to the pig sheds. We never had spare money and I never saw the inside of a cinema till I was old enough to pay for it myself. Similarly things like beefburgers, fish & chips,curry etc etc, until I could buy them myself I had never tasted them.

We always ate well as children though. My father used to grow pretty much all our own veg in the garden and we used to make our own bread. Milk came from the farm and so did chickens for meat.

He had an accident at work due to incorrect safety gear being issued by the farm (leg was crushed by a large boar) and was subsequently sacked. This meant we lost our home too. We ended up in a council terrace newly built in a town called Romsey where I grew up. My father took jobs for less than dole money just to hold his head up in public and say he was working.

He finally got a job (after many operations to repair his damaged knee) as a landscape foreman. He stayed with that company for 22 years having used his unfair dismissal award from the farm to buy a stake in the business.

Now at the age of 66 he has had 2 knee replacement operations, has terminal cancer and a heart murmer, is comfortably retired (thanks to his critical illness policy paying out) but still takes nothing forgranted.

What he has taught me is the value of money, but more importantly the value of the things that really matter in life.

Who gives a damn if you do not have the latest designer shoes? Save for them and buy them when you can afford it. When I was a child and we had to move out of the farm cottage we were happy with furniture given to us by relatives, friends etc. When I bought my first house I furnished it from the Oxfam shop and what family were giving away. OK, it wasn't a swish loft apartment furnished in the lates contempary designs but everything in it was MINE. This then meant that when I sold the house having not increased the mortgage to buy consumer durables I was able to truly trade up using the equity in the house.

The majority of people setting up homes these days are not content with anything less than brand new. It is the fault of the materialistic society in which we live.

This is also not helped when you have things like the Northern Rock together mortgage offering you 125% mortgages. I have seen people being advised to 'take a holiday to get over the stress of moving' with the surplus. What a sodding joke.

Here's a question for you:

When I was saving for my first house, for the christmas and birthday presents a few years before I always asked for 'bottom drawer' items to help kit out my first place. Does anyone do this anymore or is it all left till the last minute?

Rant over

Apologies

Andy

lynzpower

Completely agree with you Andrew and truth be told before MSE, I was one of these want it now people, to be honest I was taught no different.

Although when I went to uni, I scavved old pans, duvet covers the works off of aunties and the like, and for presents before I got some book vouchers towards moving away.But all the other girls I lived with went to argos adn bought everything from new with thier new student overdrafts.