FTBers sleepwalking into negative equity which threatens to leave manny trapped

RenovationMan

Graham_Devon wrote: »

Depends really. While the national indexes don't show a drop per se, they do when you view them in some regions. So in these cases, the article will be completely factual.

It's easy to write it off though, I'd agree. But that ignores the wider message, and as they say, ignore at your peril.

Your advice would appear to be for FTB's to simply ignore this. I wonder if you would do this yourself?

The article states around 40,000 FTB's a year are affected. There are of course, more than 40,000 FTB's a year. So it's certainly not suggesting all FTB's.

If FTBers ignore this article, at their peril, and buy a house that loses 20% of its value in a crash, would you struggle to find any financial astuteness in their purchase?

the_flying_pig

joe_blotts wrote: »

Possibly. I just thought 'supply demand alone sets price' is a bit too simplistic but I get your point.

This really isn’t difficult.

Imagine that you live on a smallish island [population 50k] whereeveryone lives & works locally. You’ve got a huge garden that you splitinto two. In one part of that garden you build a house, hoping to sell it, youset an asking price of £100k. The average local wage is about £20k p.a. Thelocal building society will lend people about 4 times their annual salary and demandsabout a 10% deposit. The local government don’t pay any kind of benefits, e.g. allpeople who can’t afford private rents or mortgage repayments are housed in a smalltent city & live, on a subsistence basis, off the land.

****‘Demand’ is nothing more or less than a measure of howmany people there are on the island who are credible buyers for your house at aprice of £100k****

Consider the potential impact on demand of the followingevents:

1 – Tens of thousands of completely unemployable, penniless,people arrive from the mainland. This clearly has no impact whatsoever on the demandfor your house.

2 – The local building society now decides it’ll lend up to6 times salary, with no deposit requirements – this leads to a huge increase indemand.

3 – A few dozen very rich people arrive from the mainland, withsquillions of cash in their bank accounts, all of them setting up businesses onthe island, pushing up both the average wage & the number of peopleemployed [enabling some people to move out of the tent city] – causing a massiveincrease in demand.

4 – The local government decides a radical new policy to [housing]benefits – homeless people simply have to find a landlord-owned house that theylike the look of & government will pick up the bill – this creates a colossalincrease in demand [from landlord].

5 – A belief sweeps the island that local house prices are adead cert to skyrocket & that owning a second home will earn most people onan annual basis more than their job – yep, same again, demand is booming.

Examples 2, 3, 4, 5, all have flipsides, of course. Tighter lending,lower wages, less generous benefits, less belief in ‘four walls to a fortune’,these things all substantially reduce demand.

joe_blotts

Thanks I get all that. However alot of the bulls on this forum constantly throw up the argument that there is a housing shortage and hence a large demand for housing that will sometime in the near future create a 'boom' without ever considering the things that set demand as in affordability, availability of credit, credit worthiness of the borrower etc etc. Which was my point.

'There are a lot of people that want to own so therefore house prices must go up' just doesn't cut it unless you look at those things that affect demand. The kind of things you outlined above.

Thrugelmir

Around 40,000 first-time buyers a
year are sleepwalking into a negative equity trap which threatens to leave many unable to move for a decade.

Historical average is a house move every 7 years. So not that bad.

Life is a choice. Pay the mortgage down quicker would appear to be the answer to build equity .

the_flying_pig

joe_blotts wrote: »

Thanks I get all that. However alot of the bulls on this forum constantly throw up the argument that there is a housing shortage and hence a large demand for housing...

Yes but as you may have noticed said "bulls" on here make for a pretty miserable collection of estate agents, landlords, second homers, and wannabes in all three categories, whose opinion on te subject is as hopelessly biased as it is clueless.

Population growth is, yeah, a bit less than a half a percentage point per year. The equivalent of another new person searching rightmove for every two hundred and something people that there are already on there. The increase due to immigration & higher birthrate of immigrants tends to add people who each have less to spend than the existing population on average. Now, whilst this added demand for housing is real, and important, it's a trivially insignificant speck when set alongside a really key event such as a sharp credit market loosening or tightening, which can at a stroke add or subtract tens of percentage pts to or from the total amount of money that's chasing after housing. Even the silly old sods on here who bang the pwoperdee drum the very loudest know this deep down.

joe_blotts

the_flying_pig wrote: »

Yes but as you may have noticed said "bulls" on here make for a pretty miserable collection of estate agents, landlords, second homers, and wannabes in all three categories, whose opinion on te subject is as hopelessly biased as it is clueless.

Population growth is, yeah, a bit less than a half a percentage point per year. The equivalent of another new person searching rightmove for very two thousand and something people that there are already on there. The increase due to immigration & higher birthrate of immigrants tends to add people who each have less to spend than the existing population on average. Now, whilst this added demand for housing is real, and important, it's a trivially insignificant speck when set alongside a really key event such as a sharp credit market loosening or tightening, which can at a stroke add or subtract tens of percentage pts to or from the total amount of money that's chasing after housing. Even the silly old sods on here who bang the pwoperdee drum the very loudest know this deep down.

Good post.

Percy1983

I really don't see a big problem with negative equity, if prices drop there is a chance I will be there, as it is I already have an emergency negative equity plan in place... live in it and pay the mortgage.

RenovationMan

RenovationMan wrote: »

If FTBers ignore this article, at their peril, and buy a house that loses 20% of its value in a crash, would you struggle to find any financial astuteness in their purchase?

No answer from Devon on this one. I wonder why? :rotfl::rotfl:

IveSeenTheLight

joe_blotts wrote: »

Thanks I get all that. However alot of the bulls on this forum constantly throw up the argument that there is a housing shortage and hence a large demand for housing that will sometime in the near future create a 'boom' without ever considering the things that set demand as in affordability, availability of credit, credit worthiness of the borrower etc etc. Which was my point.

'There are a lot of people that want to own so therefore house prices must go up' just doesn't cut it unless you look at those things that affect demand. The kind of things you outlined above.

Think of Demand and Supply as headers in an excel spreadsheet / piece of paper.
Underneath, consider the factors which would affect it and then consider the secondary effects.

For example, credit availability, if it is restricted, it will reduce demand as fewer people have the ability to obtain mortgages. This then means that the imbalance between demand and supply would drive prices lower.
As prices lower, some of those who have made their property available may either choose to take their property off the market if they cannot achieve what they want, else they may need to take it off the market if it affects their LTV / NE position.

Invariably, Supply will always match demand, it;s just the time period where the factors cause the imbalance that will lead to prices increasing or decreasing.