Property !!!!!! A Nation Hypnotised? Blog Discussion

ManAtHome

But we don't seem to have adjusted to the low-inflation cycle. In the days when interest rates were high, wages were keeping pace (as they are at present), so that capital amount borrowed declined rapidly in real terms. In general, you could be confident that anything on the edge of affordability would be comfortable within a few years.

To me, the main problem is that this leaves you open to cashflow problems for much longer than in the past. With disposable incomes only going up by one or two percent a year, more and more people are dropping into the "asset rich, cash poor" category - probably good news for the loans market.

Longer term I don't see how this can work out to a good conclusion. We have growing liabilities as a country which will need to be funded (mainly public-sector pensions and PFI). Future governments are going to have to improve their cashflow to cover this - my guess is that "services inflation" (my term for normal and stealth taxation) will continue well above CPI inflation rates. So we have high living costs, ever-increasing cost of essentials/taxation, low pay-rises and an increasing number of people who have no assets other than property.

EdInvestor

I think you're making things unnecessarily complicated.

The price of a house is determined by what a buyer will pay for it.

What a buyer will pay is determined in most cases by how much he can borrow.

How much he can borrow depends on how much the lender thinks he can afford comfortably to repay.

This depends on how much he earns and the interest rate charged on the loan.

Low interest rates mean the monthly repayment is lower. Thus the borrower can afford to repay a bigger loan.

As loan sizes grow, buyers can offer more and house prices rise to meet the new ceiling.

THat's the basic mechanism.

I doubt however we will see a continuation of the very substantial rises of the last few years.IMHO there were two reasons they were so large.

The first was the switch from the high interest-rate to the low interest rate environment as discussed above.

The second hasn't really been discussed much, but it seems to me that in around 1996-97, the market was quite seriously oversold: that is, the post 1989 crash had overshot and prices were much lower than they should have been.

I suspect that's why some quite sharp people erroneously thought that the market had peaked in around 2001-02.They hadn't taken into account the over-correction. If you adjust for that, the rises don't look anything like as overblown.

whambamboo

BTW, for the benefit of buy-to-let 'investors', here's what's already happening in the US.

http://housingpanic.blogspot.com/2006/09/ok-this-would-be-funny-if-it-wasnt-so.html
http://iamfacingforeclosure.com

He deserves it of course.

As soon as prices start falling, people get into serious trouble.

$2 million in debt, hmm, only got himself to blame.

Of course, there's no way this kind of thing could happen here.

Oh wait yes there is.

"‘As everyone knows, when a bubble bursts, the smaller the bubble, the better it is.’”
Unfortunately, even with small bubbles, stupid investors like the one above are already deep in the doo doo, and the US housing bubble is not nearly as bad as the one here.

UK house prices:
worth £100,000 in Q2 1976
worth £205285 in Q2 1981
worth £315322 in Q2 1986
worth £472097 in Q2 1991
worth £451764 in Q2 1996
worth £746660 in Q2 2001
worth £1405896 in Q2 2006

In the US
$100000 in 1976 Q2
$162664 in 1981 Q2
$205566 in 1986 Q2
$260311 in 1991 Q2
$292985 in 1996 Q2
$384477 in 2001 Q2
$601675 in 2006 Q2

So the US buble isn't nearly as big as the UK one - over there, prices have doubled in 10 years. Here they have more than tripled in price.

It's very clear that the pain will be much worse here.

inmypocketnottheirs

whambamboo wrote:

BTW, for the benefit of buy-to-let 'investors', here's what's already happening in the US.

http://housingpanic.blogspot.com/2006/09/ok-this-would-be-funny-if-it-wasnt-so.html
http://iamfacingforeclosure.com

He deserves it of course.

As soon as prices start falling, people get into serious trouble.

$2 million in debt, hmm, only got himself to blame.

Of course, there's no way this kind of thing could happen here.

Oh wait yes there is.

"‘As everyone knows, when a bubble bursts, the smaller the bubble, the better it is.’”
Unfortunately, even with small bubbles, stupid investors like the one above are already deep in the doo doo, and the US housing bubble is not nearly as bad as the one here.

UK house prices:
worth £100,000 in Q2 1976
worth £205285 in Q2 1981
worth £315322 in Q2 1986
worth £472097 in Q2 1991
worth £451764 in Q2 1996
worth £746660 in Q2 2001
worth £1405896 in Q2 2006

In the US
$100000 in 1976 Q2
$162664 in 1981 Q2
$205566 in 1986 Q2
$260311 in 1991 Q2
$292985 in 1996 Q2
$384477 in 2001 Q2
$601675 in 2006 Q2

So the US buble isn't nearly as big as the UK one - over there, prices have doubled in 10 years. Here they have more than tripled in price.

It's very clear that the pain will be much worse here.

Can you really compare the US and UK housing markets, I think not. Infact the UK housing market I think is pretty unique. FIstly we have very limited spance (not applicable in the US), and a shortage of property (not applicable in the US).

zcaprd7

I guess the only real benefit then is that the national obsession forces people to actually invest in something (the capital aspect of the monthly mortgage repayment) rather than p1ssing it up the wall...as such its certainly in the governments interest to encourage home ownership (and they can nab some of the capital gain off you when you die).

I suspect many wouldn't be inclined to rent, and save/invest the money saved each month?

F_T_Buyer

EdInvestor wrote:

Indeed they are.But there is a very logical and obvious reason for this.In the old days when multiples of 3X were the norm, interest rates were in the double digit range between 10 and 15%.:eek:

Now, interest rates are in the 3-6% range.Thus people can afford to service much larger mortgages.Thus lenders are lending them much more money, multiples are much higher and house prices have gone up.

The bottom line for a future homebuyer is quite simple IMHO:

Will interest rates return to double digit levels? If this did happen, then almost certainly house prices would be likely to crash dramatically and it would be best to stay out of the market.

Or will they remain in the range they have been in for the last decade,since responsibility for them was handed over by Gordon Brown to the Bank of England? In so, then very likely house prices will not crash, they will continue to rise, more or less in line with rises in incomes.

So what's your view: a major rise in interest rates, or much the same as we have now going forward?

If the former, then stay out of the market.If the latter, then there should be no major unexpected surprises if you buy.

Oh right. So people are buying on repayment mortgages over a typical 25 years? Nope, more and more people are going for interest only. Even in the 90s, people had a repayment vehicle like an endowment. More people now are are avoiding repaying the debt, rather just pay the servicing of that debt.

If you're so right, why are house reposessions, bankruptcies all going up?

Interest rates only need to get to around 5.25% to 5.5% to have the same effect as the peak in the 90s, yet this is still historically low.

Here's the historical interest rates: http://213.225.136.206/mfsd/iadb/Repo.asp?Travel=NIxIRx

Look when the crash happened in the 90s... and look how falling interest rates didn't stop the falls...

The fact is the banks have got greedy, and simply lent far too much to people. The consumer is stupid, and thinks it's a sure thing to borrow the amounts offered.

EdInvestor

F_T_Buyer wrote:

More people now are are avoiding repaying the debt, rather just pay the servicing of that debt.

The lenders these days are not bothered: apart from the fact it's likely the loan can be repaid at maturity through selling the property, most borrowers will have moved on by then due to "rate tarting" so it will be someone else's problem.If it is still the bank's problem, then they can solve it by converting the I/O mortgage into a repayment mortgage over a longer term, or into equity release lifetime mortgage.

If you're so right, why are house reposessions, bankruptcies all going up?

I'd have thought because the bankruptcy rules have been massively eased, removing the stigma and enabling people to escape from the worst aspects of it in a very short time.

Interest rates only need to get to around 5.25% to 5.5% to have the same effect as the peak in the 90s, yet this is still historically low.

Well that's what you say, I think they would have to go much higher than that.

Look when the crash happened in the 90s... and look how falling interest rates didn't stop the falls...

Large rises in interest rates from a very high base started the fall in the late 1980s. Since then policymakers when facing a potential financial crisis have learnt a new trick.Rather than put interest rates up, they bring them down.

This seems to work. :T

The fact is the banks have got greedy, and simply lent far too much to people.

So far, there are no signs of this having a serious effect on their profits, but you can be sure that sharegolders and regulators have been on watch for any weakness for some time.

The consumer is stupid, and thinks it's a sure thing to borrow the amounts offered.

The consumer probably thinks that if the bank is willing to lend him the money, its reasonably likely that he will be able to pay it back.He - and the bank - are probably right. The bank after all has more experience than you and me in judging credit quality.It's not in their interest to get it wrong. The higher the risk, the higher the rate and the charges: that's the market at work.

WesternExpress

EdInvestor wrote:

It is possible to make arrangements to use both IHT nil rate bands.



I think the answer to that is you wait a little bit longer People do need to regard property as a very long term investment - 25 or 30 years:7 years is a blip.

There is one main problem with advising today's young generation not to buy a home I think. It relates to the extreme difficulty these days of saving for retirement.

In order to provide yourself with an income of the same level of the basic state pension - 85 quid a week, regarded as derisory by many - you would have to save up 120,000 pounds.

Now that's a lot of money.We are talking nearly half a million quid to provide a pension of 20k p.a.

How do you expect people to save up that kind of money? It's completely impossible for many: they will be lucky to put together half as much.

Unless they have bought their own home and it has appreciated in value sufficiently over the years that they can "trade down" when they get old, and release a lump sum to invest for income to supplement whatever pension they have put together.

That's the outstanding value in homebuying: most people have to pay money to live somewhere. Paying rent gives you a place to live,but buying a home gives you a place to live AND an investment.Yes there is some risk, but over 20-30 years it's pretty negligible, so small that Governments worldwide have always encouraged their people to become homeowners.

Or do you expect people to rent for their whole lives, have no savings and just live on benefits when they are old? Some people do make a personal decision to do this, that's up to them, but I don't think I would actually advise anyone to go this way. Would you really like to live on pension credit, currently 114 pounds a week?

Frankly I'd much prefer to be worrying about inheritance tax.

One big reason for not being able to save more for retirement is the huge mortgage repayments that are now necessary. That and the general fallicy that the stock market is a failure so we'd better invest in a much more mature market where experts do full research (ie they buy a BTL).

Chrysalis

EdInvestor wrote:

I think you're making things unnecessarily complicated.

The price of a house is determined by what a buyer will pay for it.

What a buyer will pay is determined in most cases by how much he can borrow.

How much he can borrow depends on how much the lender thinks he can afford comfortably to repay.

This depends on how much he earns and the interest rate charged on the loan.

Low interest rates mean the monthly repayment is lower. Thus the borrower can afford to repay a bigger loan.

As loan sizes grow, buyers can offer more and house prices rise to meet the new ceiling.

THat's the basic mechanism.

I doubt however we will see a continuation of the very substantial rises of the last few years.IMHO there were two reasons they were so large.

The first was the switch from the high interest-rate to the low interest rate environment as discussed above.

The second hasn't really been discussed much, but it seems to me that in around 1996-97, the market was quite seriously oversold: that is, the post 1989 crash had overshot and prices were much lower than they should have been.

I suspect that's why some quite sharp people erroneously thought that the market had peaked in around 2001-02.They hadn't taken into account the over-correction. If you adjust for that, the rises don't look anything like as overblown.

interest rates will rise its inevitable its just a matter of when, anyone who thinks we will have low interest rates lasting for 25 years is delusional.

EdInvestor

WesternExpress wrote:

One big reason for not being able to save more for retirement is the huge mortgage repayments that are now necessary. That and the general fallicy that the stock market is a failure so we'd better invest in a much more mature market where experts do full research (ie they buy a BTL).

Very true.The corollary of high house prices caused by the change to low interest rates has been the massive sums now required to buy even a small pension income. To get an annuity worth as much as the basic state pension (85 quid a week) you would now have to save up 120,000 pounds.

The collapse in annuity rates is the main reason we have a pensions crisis - it's fortunate that at least those retiring now have seen a simultaneous boom in the equity in their homes, so at least this will make up some of the shortfall ( if the kids don't get hold of it first!).

Looking long term, target no 1 has got to be to bring down the very high charges in the financial services system: these are going to have to be eliminated if people are to get an adequate return for their investment in the new era ( a 1% charge takes 25% of a pension fund over a lifetime's saving - when returns were 13% a year it didn't matter, but now they're more like 7%).

The merits (or not) of BTL are something else - I too prefer the stockmarket these days.But given the fact that people have to pay rent anyway, the opportunity of getting additional investment equity more or less free by buying their own home is going to become even more important in the new era when every little helps.