House Price Crash 3

pault76

Now i don't confess to being an economist, but like to think that I think logically and use a little common sense.

With this in mind, I sometimes cannot believe what I hear when friends say they are looking to buy a house. They (and ususally their partner) go and see a mortgage advisor who tells them they can borrow, for example, £150,000. With no deposit to speak of, they then start looking in the £150-160,000 range.

I think it is this now common British mentality of 'if they'll lend me it i'll take it' that is keeping the housing market alive- with no thought to 'what if'

I'd have thought that the best way to slow things down at a rate to minimise the impact of another 'crash' is for mortgage lenders to stop allowing people to borrow these ridiculous amounts of money. Then, if there are any major rate rises, people should hopefully not be hot as hard if they are borrowing 3 x their salary as if it were 4 x.

The top end of the market would obviously suffer a little at first, but surely better this than the rate of repos' at the feeder end of the market going sky high?

F_T_Buyer

pault76 wrote:

I'd have thought that the best way to slow things down at a rate to minimise the impact of another 'crash' is for mortgage lenders to stop allowing people to borrow these ridiculous amounts of money. Then, if there are any major rate rises, people should hopefully not be hot as hard if they are borrowing 3 x their salary as if it were 4 x.

The top end of the market would obviously suffer a little at first, but surely better this than the rate of repos' at the feeder end of the market going sky high?

The problem is if they started being sensible about what they lend, they will lose market share, and that won't keep shareholders happy. They have very little choice than to go with the herd...

Nationwide tightened lending criteria at the start of 2005, although never mentioned this public ally (and kept the positive spin going). When their accounts were available for all to see, you could see they lost market share. They then went on saying they tightened lending to reduce future bad debt.

Since, they have loosened lending criteria to gain back their market share. So, all their prudence has gone out of the window. The problem is, they need to constantly offer easier credit terms (high mortgage multiples) to keep the show going, the question is, when will the system break.

At that point you will see the securitised debt market behave like the unsecured debt, and they will tighten. Then house prices will fall.

If any of you are thinking it serves the banks right, just remember a lot of this debt is packaged together and sold to the money markets, and a big player of this is pension funds!

PoorDave

The more a lender will lend, then more attractive they seem to borrowers!

So if you lend 5.5x joint salary and Bloggs Bank only lend 5.0x joint salary, you're going to get lots of business off them!

The only way i see to get the lending multiples down is regulation of the market, and that kind of measure might be just the trigger a house price crash was waiting for. Imagine you could borrow 5x on Friday, but only 3.5x on Monday, there would be a big rush to buy before Friday, followed by a massively slowdown in the market from Monday, i think.

F_T_Buyer

PoorDave wrote:

The only way i see to get the lending multiples down is regulation of the market, and that kind of measure might be just the trigger a house price crash was waiting for. Imagine you could borrow 5x on Friday, but only 3.5x on Monday, there would be a big rush to buy before Friday, followed by a massively slowdown in the market from Monday, i think.

The problem is quite the reverse has happened. The BoE has allowed commercial banks to hold less and less in reserves. This means they can lend out higher and higher multiples based on what deposits they had.

Recently, China has took actioned to slow the credit market (how sensible), they made commercial banks increase reserves from 16% to 16.5% (meaning they need more deposits to lend more). In the UK, the average reserve is 3.3%, a stupidly low amount.

This is why interest rates on deposit account have been so pitiful over the years. One step in the tightening cycle is offering higher interest rates to savers, which we are slowly seeing now with regular savers; although in this case I suspect it's more to do with attracting and keeping new customers.

This is why lots of critics say the goverment and BoE could have done alot to stop a credit bubble forming. But, who's gonna stand in the way of the banks massive profits when it's the banks that are funding the political parties... don't bite the hand that feeds you, comes to mind!

dougk_2

PoorDave wrote:

The only way i see to get the lending multiples down is regulation of the market

And regulation is unlikely as its in the governments (and lenders) interest to keep house prices high. Eg higher stamp duty payments, higher insurance tax , higher rental charges (eg. taxable income from landlords).

westernpromise

Actually one thing I can see as being likely to trigger a crash is this wheeze of replacing the council tax with a wealth tax, based on the value of the house as decided by the council, including things like the view and the quality of the local schools.

One estimate in the weekend press was that this could increase some people's council tax by a factor of five.

So where 10 years ago you were paying £300 in council tax, you're now probably paying £1,000, and that's going to go up to £5,000.

That would certainly trash the market. The council tax on my £450k BTL in west London is £1,000. If that went to say £4,000, then it would equal 25% of the mortgage.

Since 1997, pensioners unwise enough to stay in the family home have learnt to live in poverty thanks to rocketing council tax, so the above would mean we will all have to do likewise. Conveniently, of course, council tax has already been removed from the inflation measure, so it won't flow through into inflation-related pay rises (other than for MPs I expect).

Of course, nobody will actually get any more services in exchange for paying 5 times as much. It appears to be a measure designed to punish the south for having suffered from house price inflation.

Guy_Montag

westernpromise wrote:

That would certainly trash the market. The council tax on my £450k BTL in west London is £1,000. If that went to say £4,000, then it would equal 25% of the mortgage.

F'k me, the council tax on my £25k (when the LL bought it) 35sqm, band A flat in the North East is £1000. Only £750 'cause I live alone. Gee thanks.

westernpromise

It's in Westminster, which traditionally sets the second-lowest council tax / community charge / rates in London, if not the country.

Woby_Tide

the House Price crash thread is a bit like a school reunion, it comes around every year, the same old faces appear, some disappear, some new ones arrive, then we all wonder why we bothered as it wasn't very good, just like last years thread

dougk_2

Woby_Tide wrote:

just like last years thread

and the one the year before and the one the year before that!

And why compare us to the US? We are not the same and don't have the vast acres of untouched land with little concern for the environment and lack of planning laws and and they don't have an open door immigration policy!