Interest rate increase wrong time to buy?

Martinslovechild

Firstly, let's look at the facts:-

1. Interest rates are historically low. They're not called 'historically low' for nothing.

2. House prices are currently 36% above long-term trend. Check out this spreadsheet on Nationwide Building Society's website, in particular the graph at the bottom of the sheet.

3. The average earnings ratio for first-time buyers is now 5.0 for the UK (i.e. the average first-time buyer needs to borrow 5.0 times their salary to afford an average priced house). In London the figure is 6.5. This has been creeping up from a UK average of just 2.1 in 1995.

Now ask yourself:-

1. If inflation is creeping up (it was headline news on Tuesday), then what is the outlook for interest rates?

2. Do you think that there will be a 'soft landing' (the term banded about by those who have an interest in selling houses, e.g. newspapers, estate agents, television programmes), or will there be a crash? For a clue, check out the Nationwide graph again - notice how there's been no such thing as a 'soft landing' since 1975, only peaks & crashes.

3. Is an average earnings ratio of 5.0 sustainable in the long-term?

4. Average wage increases were 3.6% in November. Retail Price Inflation was 3.9% during the same month. Quite simply, this indicates that a lot of people are effectively receiving a pay cut. RPI currently stands at 4.4%, so they're even worse off.

I don't think it takes a Rocket Scientist to work out what's going to happen. It's merely a case of when.

matimage

Hmm, my opinion is if you are buying a house to live in it and be happy there for a good few years interest rates will have no impact on you(if you can afford the mortgage payments and possible increases which you say you can).

I bought a house in a hurry 4 and a half years ago but quickly realised it was in an awful area and got out fairly quickly. Now, if there had been a crash or we had lost equity there is no way we could have moved out.

I really like the house we are in now and can see us being happy for at least another 5 years (maybe when kids come along, eep!). If there was a crash tomorrow and the house value dropped below what we paid for it I wouldn't be too fussed. I would just stay here until it at least equalised.

I may be completly wrong in this assertion but it works for me.
M

Martinslovechild

matimage wrote:

If there was a crash tomorrow and the house value dropped below what we paid for it I wouldn't be too fussed. I would just stay here until it at least equalised.

I may be completly wrong in this assertion but it works for me.

Bear in mind that from the peak, it could take 3-5 years to hit the bottom of the housing market cycle. From there, it could take another 7 years just to climb back up to the long-term trend value.

That's potentially 12 years in an area which you may not like, just to hit the long-term trend value of a property (still well below current values which are 36% above trend). Ouch!

toonfish

surfcat wrote:

Do you not perhaps consider that if the industry press started mentioning a crash then it would already be well underway? Why on earth would they want to talk up a crash?

Conversely if they were expecting house prices to crash would they be increasing their lending multiples, and bending over backwards to lend. Prices may well "crash", personally I doubt it, but my main point is that the same thing has been predicted for a few years now.

meanmachine_2

toonfish wrote:

No-one that I have seen in the industry press is predicting a house price fall, let alone crash. The general concencus is that prices will increase at 4-5% this year. Interest rates are still historically low, and you can expect one or two more rises this year in my opinion, but I don't think there will be more than that.

In a poll of turkeys, 99.9% predicted there would be no Xmas this year and it was fine to carry on gobbling up grain like there's no tomorrow.

Also, I would expect any "adviser" of mine to be able to spell consensus.

Call me old fashioned.

But seriously: if you can afford rates of 20%, my advice is to borrow more at a 10 year fix and stay put in a place you like rather than squeeze into a first rung dung hole.

movieman

Conversely if they were expecting house prices to crash would they be increasing their lending multiples, and bending over backwards to lend.

Banks have to lend money to make money, and to lend money right now they need insane lending multiples and 'lie to buy' even to justify those; they only worry about bad debts _after_ the crash begins.

And don't forget that they sell many of those mortgages on to 'investors', so they won't take a big hit if the borrowers default, the 'investors' will.

Prices may well "crash", personally I doubt it, but my main point is that the same thing has been predicted for a few years now.

The housing market was stagnant in 2005 until the BoE morons cut interest rates; had that cut not occurred and encouraged speculators to believe that the BoE would always cut rates to prevent them losing money, we'd be having a full-blown crash by now.

matimage

Martinslovechild wrote:

That's potentially 12 years in an area which you may not like

Yup, thats why I am glad I got out of the crappy place and into the great place I am in at the moment. :cool:

Kuztardd

im quite concerned about the interest rates.. but a slant on it could be like this..
if i rent, we would be forking out around £10,000 a year on rent (couple shharing @£200 a week)
so if i were to buy now, and prices were to go down, im sure that within 5 years, hopefully my property wouldnt have gone down £50k..??
but then again... who knows how far it could go down, if at all?


edit: doh..just realised this doesnt take into account interest on a big mortgage.. so feel free to ignore my above comment.. or does it have some standing?
yeah.. im new to all this, sorry..

Martinslovechild

Kuztardd wrote:

im quite concerned about the interest rates.. Who knows how far it could go down, if at all?

Again, the answers are within the Nationwide Building Society spreadsheet. If there is a crash, then crashes historically tend to drag prices below the long-term trend for houses.

Therefore, to achieve this, they must fall at least 36% (just to hit trend), and history dictates that they will fall further (between 40%-50%).

Whilst I have my own opinions on what will happen within the housing market, I'm merely referring here to what's happened historically. It's important to understand the past to have an idea of what may happen in the future.

movieman

Therefore, to achieve this, they must fall at least 36% (just to hit trend), and history dictates that they will fall further (between 40%-50%).

And remember that's an average: some areas with high wages wouldn't be hit so bad, while the areas where prices are now more like 10x local wages might well see a 70-80% drop.

Also, if houses become more affordable to first-time buyers, then the price of flats will totally collapse; no-one is going to be paying 200,000 pounds for a flat if they can buy a decent house in the same area for 80,000 (well, not unless it's an incredibly fancy flat anyway).