House Price (Non) Crash 1

sarah_elton

Generali wrote:

This suggests to me that either house prices have to rise at a lower rate or incomes at a higher one. I don't see what will drive wages to rise much more strongly than they do at present. This suggests to me that if I buy a house for my son today, he'll be independent from ever having to work. Or that house price inflation must slow or go into reverse.

This suggests to Mrs Generali that I should get out more but the point is made. Waddaya think?

I agree entirely the current rate of growth is unsustainable. However, as you say, this could mean the rate slowing for a prolonged period, rather than the devastating crash many are predicting. Now, historically this is highly unlikely as it's a cyclical market like most others. Historical cycles would suggest a fall in prices rather than stagnation.

But we're currently lacking a shock to prompt this. People on here are saying well what if we have 15% IR's again. Since the MPC took control of IR's they've been a lot more stable than in the 60s-80s. Yes they're low, yes by historical levels they should be a few per cent higher, but we don't see the very rapid changes in rates we used to. The MPC will raise rates at a much more gradual pace than political parties would 20 years ago. IMHO if people can comfortably afford their mortgage up to a rate of say 9% and are happy to ride out any cyclical fall and subsequent rebound, they shouldn't be losing too much sleep.

Generali

Indeed. I do wonder about the rates being low too. I remember seeing an article (in the FT?) written by Gavin Davis saying that if you take the average base rate since the formation of the Bank of England you get 5.01%. He reckoned that you should always ask yourself why rates aren't 5%.

BTW, as the above figures are not inflation adjusted, the extrapolation holds, I argue. Someone from 1970 may well be surprised that their house had risen 10 fold in value but not so much by the inflation adjusted rise.

Alan_M_2

sarah_elton wrote:

I agree entirely the current rate of growth is unsustainable. However, as you say, this could mean the rate slowing for a prolonged period, rather than the devastating crash many are predicting. Now, historically this is highly unlikely as it's a cyclical market like most others. Historical cycles would suggest a fall in prices rather than stagnation.

But we're currently lacking a shock to prompt this. People on here are saying well what if we have 15% IR's again. Since the MPC took control of IR's they've been a lot more stable than in the 60s-80s. Yes they're low, yes by historical levels they should be a few per cent higher, but we don't see the very rapid changes in rates we used to. The MPC will raise rates at a much more gradual pace than political parties would 20 years ago. IMHO if people can comfortably afford their mortgage up to a rate of say 9% and are happy to ride out any cyclical fall and subsequent rebound, they shouldn't be losing too much sleep.

Actually you've probably highlighted one of the very things that could cause a correction. You are right in what you're saying about 15% rates, it's highly unlikely that even will occur again (in reality they were only at that level for 4 hours anyhow, it was actually 12% long term).

The problem is with increased leverage (larger mortgage/income mulitples) it requires smaller movements in rates to create the same havoc, after all, the sums of money are vastly increased.

If rates did actually hit 9% there would be catastrophe:-

There's a thread on here where a couple are cited buying a £300K property on a joint income of £75K with a 100% mortgage.

At 5.5% repayments would be in the region of £1850 a month over 25 years, not unreasonable on a net income of around £4000.

The same loan at 8%

Payments £2,300

Again at 9%

Payments £2,500

10%

Payments £2,700

Could they make the payments? Quite probably, but with all other household bills they'd not be able to have any standard of living at all without a substantial wage increase.

Also any correction in prices could lock them into the property until the next cycle.

Alan_M_2

Generali wrote:

Indeed. I do wonder about the rates being low too. I remember seeing an article (in the FT?) written by Gavin Davis saying that if you take the average base rate since the formation of the Bank of England you get 5.01%. He reckoned that you should always ask yourself why rates aren't 5%.

BTW, as the above figures are not inflation adjusted, the extrapolation holds, I argue. Someone from 1970 may well be surprised that their house had risen 10 fold in value but not so much by the inflation adjusted rise.

Indeed, but inflation on the level you are talking would simply decimate any manufacturing industry that we have left, effectively kill our GDP, at which point we'd have far more to worry about than house prices falling, the UK economy would be in meltdown.

abaxas

sarah_elton wrote:

I agree entirely the current rate of growth is unsustainable. However, as you say, this could mean the rate slowing for a prolonged period, rather than the devastating crash many are predicting. Now, historically this is highly unlikely as it's a cyclical market like most others. Historical cycles would suggest a fall in prices rather than stagnation.

But we're currently lacking a shock to prompt this. People on here are saying well what if we have 15% IR's again. Since the MPC took control of IR's they've been a lot more stable than in the 60s-80s. Yes they're low, yes by historical levels they should be a few per cent higher, but we don't see the very rapid changes in rates we used to. The MPC will raise rates at a much more gradual pace than political parties would 20 years ago. IMHO if people can comfortably afford their mortgage up to a rate of say 9% and are happy to ride out any cyclical fall and subsequent rebound, they shouldn't be losing too much sleep.

Rates are irrelevent, it's people ability to service the loans by repaying it that matters.

15% did that last time. Who knows what it could be now? There are people boiling alive in debt at only 5%. God knows what a couple more hikes could do to them.

Generali

My point is that house prices rising so much faster than incomes must be unsustainable - the above applies compound interest at a rate of 9.3% on house prices (the same as now) and 4.1% on incomes (ditto).

I hoped my post implied that general inflation would stay at the same level as now (take your pick from about 2%-10% as to what that is).

A rise in house prices ilke this would be catastrophic: nobody would be doing anything other than selling houses to each other on credit for a living if they had any sense. I think it unlikely to happen but it seems that some people think that this is exactly what will happen.

mobile-advice

Is a house price crash a necessity?

If house prices stagnated for the next five years, whilst wages keep on rising at their current rate, would that not have the same effect?

If the average wage was 25% higher now but house prices were the same, would prices go up by the same margin?

sarah_elton

mobile-advice wrote:

Is a house price crash a necessity?

Nope. Also, what percentage drop in prices is required for it to be a "crash"?

Alan_M_2

sarah_elton wrote:

Nope. Also, what percentage drop in prices is required for it to be a "crash"?

There is no "Figure" as house prices are not a quantifiable index in the same way the FTSE is (which out of interest a 2% drop on one days trading is officially a crash).

A housing price crash can only be citied historically.

Alan_M_2

mobile-advice wrote:

Is a house price crash a necessity?

If house prices stagnated for the next five years, whilst wages keep on rising at their current rate, would that not have the same effect?

If the average wage was 25% higher now but house prices were the same, would prices go up by the same margin?

Technically it's not necessary, but in reality wages will never inflate in the boom bust manner that house prices do, so what you find is it meets somewhere in the middle, incomes increase and house prices correct.