Labour's "Miracle" Economy

Allsmokeandmirrors

I'm glad that there are other people who share some of my views, and understand that being able to borrow against their house, to fund holidays and gadgets, is very rarely a good idea.

I still remember receiving many, many mailshots from my building society (Alliance & Leicester), trying to tempt me into borrowing more on my mortgage... it went along the lines of "Unlock the true wealth in your home".
True wealth?!? I always felt that this was a trade misdiscriptions issue!

Thanks Saubryn.. People no longer see the diving lines between the forms of lending, or understand that fundamentally borrowing should only be used when it's absolutely necessary. For instance, a mortgage is unavoidable (could anyone wait around 25 years to afford it outright?!?), but you can realistically wait 12 months to save up enough to buy that new 37" HDTV.
Credit cards have been one of the biggest dangers, which it isn't a surprise to me, since they've been very heavily marketed to the masses as another "must-have".
Problems seems to lie in the "live for today" mind-set of the nation, which inherently costs in the longer term, and the under-regulated credit industry.

And on the subject of house prices, can anyone disagree with this argument, explaining why I think that prices are way, way too high, in particular for first time buyers.

Picture the scene- A first time buyer, borrows the maximum that a bank would lend them, to buy a £90k flat. House prices are just rising in line with inflation and wages (as the government wants).
In 5-10 years time, they've outgrown this, and want to trade up to a 2 or 3 bed house. This means they need to borrow another 50k.
But to do this they'd need to borrow 140k, when their earning have only crept up inline with inflation.
Either they need to have got a much better job, paying a lot more money, or they stuck in that flat until they can afford it. Which could go into decades.

Many first time buyers have thankfully not bought in the current climate, as they can see their wages rising far too slowly in relation to the debt they'd need to take out, and the current reality of steeply rising household costs. Many of my friends that live at home are only hoping for one outcome- house pirces coming way down.

Hereward

Allsmokeandmirrors wrote:

I'm glad that there are other people who share some of my views, and understand that being able to borrow against their house, to fund holidays and gadgets, is very rarely a good idea.

I still remember receiving many, many mailshots from my building society (Alliance & Leicester), trying to tempt me into borrowing more on my mortgage... it went along the lines of "Unlock the true wealth in your home".
True wealth?!? I always felt that this was a trade misdiscriptions issue!

Thanks Saubryn.. People no longer see the diving lines between the forms of lending, or understand that fundamentally borrowing should only be used when it's absolutely necessary. For instance, a mortgage is unavoidable (could anyone wait around 25 years to afford it outright?!?), but you can realistically wait 12 months to save up enough to buy that new 37" HDTV.
Credit cards have been one of the biggest dangers, which it isn't a surprise to me, since they've been very heavily marketed to the masses as another "must-have".
Problems seems to lie in the "live for today" mind-set of the nation, which inherently costs in the longer term, and the under-regulated credit industry.

There is nothing wrong with borrowing to purchase your 37" HDTV, it just depends on what form of borrowing that you use. As you stated above if you increase your mortgage to cover the cost then you are effectively still paying for your new TV well after its useful life has expired because your mortgage term is likely to be much longer than the life of the TV; however, using a credit card or a personal loan might be a good idea if you can pay it off before the TV expires.

And on the subject of house prices, can anyone disagree with this argument, explaining why I think that prices are way, way too high, in particular for first time buyers.

Picture the scene- A first time buyer, borrows the maximum that a bank would lend them, to buy a £90k flat. House prices are just rising in line with inflation and wages (as the government wants).
In 5-10 years time, they've outgrown this, and want to trade up to a 2 or 3 bed house. This means they need to borrow another 50k.
But to do this they'd need to borrow 140k, when their earning have only crept up inline with inflation.
Either they need to have got a much better job, paying a lot more money, or they stuck in that flat until they can afford it. Which could go into decades.

Many first time buyers have thankfully not bought in the current climate, as they can see their wages rising far too slowly in relation to the debt they'd need to take out, and the current reality of steeply rising household costs. Many of my friends that live at home are only hoping for one outcome- house pirces coming way down.

The FTB will not need to move jobs or put of buying the new house because if they take out a repayment mortgage they will be increasing their equity stake in the flat each year; therefore, when the decide to move they will not need to borrow the maximum that the bank will now lend them as there wages have increased. Using an inflation factor of 2.5% pa, I calculate that the FTB would only need to borrow £117k to purchase the house. This assumes a mortgage rate of 5.65% [on a 100% mortgage], a monthly repayment of £560.77 and that they earn £30k pa when they buy the flat.

Allsmokeandmirrors

Hereward, have you factored in the increase in the increase of both property prices, running at your say 2.5% a year? So the gap widens from what could be now £35k to £50k in 10 years time. And the wages have just kept up with this increase..
Yes, in that time, there is an element of capital being paid off, but in real terms, disposable income will not improve greatly, when wage inflation is low.

My argument is that in the past, people have relied on their wages increasing considerably, to erode the early years of high mortgage repayments-to-earnings..
Would you take on a stupidly high mortgage knowing that it'll still seem stupidly high in 10 years time?

My argument is well explained here..

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/10/09/cnecon09.xml

Hereward

Allsmokeandmirrors wrote:

Hereward, have you factored in the increase in the increase of both property prices, running at your say 2.5% a year? So the gap widens from what could be now £35k to £50k in 10 years time. And the wages have just kept up with this increase..
Yes, in that time, there is an element of capital being paid off, but in real terms, disposable income will not improve greatly, when wage inflation is low.

My argument is that in the past, people have relied on their wages increasing considerably, to erode the early years of high mortgage repayments-to-earnings..
Would you take on a stupidly high mortgage knowing that it'll still seem stupidly high in 10 years time?

My argument is well explained here..

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/10/09/cnecon09.xml

I did allow for the house to increase in value, but in your example the FTB would want to move up the property ladder in 5 - 10 years. I made the assumption that it would occur in year 5 and at point the house costs £140k (again as per your example); therefore your £140k house is only worth £127k when they purchase the flat.

A mortgage may be "stupidly high" today, but as we do not know where interest rates will be in 5 - 10 years the "high" cost of your mortgage may be a lot lower if interest rates fell (or inversely a lot higher if interest rates rise).

ZTD

Hereward wrote:

A mortgage may be "stupidly high" today, but as we do not know where interest rates will be in 5 - 10 years the "high" cost of your mortgage may be a lot lower if interest rates fell (or inversely a lot higher if interest rates rise).

No it wouldn't. Interest rates are low, which means capital repayments make up a big fraction of the mortgage payment.

Your argument would be very valid with mortgage interest rates at 16%, but not at 6%.

Allsmokeandmirrors

I agree that capital repayments are currently making up a high proportion of the mortgage repayment, but what I'm ultimately saying is that property values should no way be as high as they are.. A "typical" 2 bed semi would cost between 60 and 70k approximately to build, and yet they are currently selling (here in the Southwest) for £125-135k.
The first time buyers are taking on way more than they should be, and all because of lax lending criteria, and below historically "average" interest rates.
"Lax lending criteria" is meant as lending out on an "interest only mortgage" basis, allowing way above historical multiples of LTV, and self-certified.
Which is why, by historical standards, we're in historys' biggest property price bubble. People think that because the financial institutions will lend out these huge sums, then it must be okay. And they think the government will always look after them.
The crash in the early 90's taught a lesson to a lot of people, but there are a lot that won't remember this, and so don't know that we've been there before.

If (and ultimately when) rates rise, people who bought at todays prices will realise they overpaid. And those that stretched themselves won't be able to service that enormous debt, at higher rates.

Bubbalou

very very useful thread

I am studying economics myself. This is mostly micro, with a dash of macro, and is very interesting, thank you very much!!