It's a bubble silly!

jyonda

jamesd wrote: »

I'll save my own talk of this being a bubble for a time when interest is at least above the long-term average portion of income.

Averages can be misleading. In addition, it's a well known fact that people have been stretching the truth about their incomes and deposits are often borrowed money too from one source or another which can hide the true overall financial picture.

Melissa177

I believe what caused the crash in the late 80s was a relatively minor change in tax which affected properties - it led to a lot of people selling up suddenly. I've just had a chat with a friend (who is 50+, and therefore remembers this sort of stuff!)

In a bubble, a relatively small change can be a trigger for a crash. Which is making me worry about HIPS + small interest rate rises now...

Generali

jamesd wrote: »

They can't all get it. What would they do with it if they tried? Put it in their bank, which would lend it to the bank which people were trying to withdraw money from... and on goes the circle until the other banks decide that the bank the money is being taken from can't pay its debts (which implies that the people it's lending money to can't pay theirs).

If everyone tries to get their money out at once, the bank (or the banking system) collapses. It's called 'a run' and it's why the Bank of England insures your savings (up to £30k). If you think your bank will go bust you take your money out. If everyone takes their money out at the same time, the bank goes bust.

jamesd wrote: »

Talk of people (in general) getting mortgages at 6x salary is ridiculous if you look at the real lending; most people are not newly qualified lawyers and doctors. For first time buyers the average income multiple in 2006 was 3.21 with interest being 16.8% of income and the average advance was at 90% LTV, a loan of 109,000.

For home movers it was 2.95 income multiple, interest 14.8% of income and an average advance of 126,000 at 72% LTV.

For all mortgages, back in 1990 the income multiple was 2.2 but that led to interest being 26.5% of income. In 2006 it was 3.05 but just 15.6% of income.

Over the last 32 years the average amount of income spent on interest when the loan was taken out was 15.7%. We haven't even reached the average yet.

I'll save my own talk of this being a bubble for a time when interest is at least above the long-term average portion of income.

This is true. However, almost 1/3rd of purchases are BTL apparently. These loans are given without reference to the purchaser's income I understand. IMO, it's this bit of the bubble that's going to bite us when (if?) it unwinds.

kingkano

Melissa177 wrote: »

I believe what caused the crash in the late 80s was a relatively minor change in tax which affected properties - it led to a lot of people selling up suddenly. I've just had a chat with a friend (who is 50+, and therefore remembers this sort of stuff!)

In a bubble, a relatively small change can be a trigger for a crash. Which is making me worry about HIPS + small interest rate rises now...

That was more than a MINOR change. You used to be able to claim tax relief on the interest portion of your residential mortgage. I think it was upto 30k per year per person/married couple. An unmarried couple could claim the tax back on £60k of interest per year!!! Considering a large proportion of a mortgage is interest, this was a super incentive to BUY a house. It was taken away and suddenly people had to pay 20% more of their mortgage payment I guess.....

As for HIPs having the same affect? Tough call. I wonder if it will have the opposite.... less people willing to put their house up just to 'see what I can get' means less overall property ON the market = less supply with the same demand.

Melissa177

Ah, the reason that my friend called this a "minor" change was because he lives with his family in a 2 million property now! So tax relief on 30K was probably small change to him.

I would have thought HIPS might mean a glut of properties coming on the market this month before the regulations come in on June 1st.

HOWEVER, listening to MoneyBox yesterday, Michael Gove (Conservative Spokesman for Housing) said that the Conservatives were challenging HIPS, and there will be a formal debate in the commons, which if the Conservatives win, means they can be scrapped.

And whilst I'm a Conservative voter myself, I don't have much faith that they will win this debate!

sillybean

one way i use to value a house is by:

1. Looking on the web as you can get real sale values for the street.

2. look on right move, work out the rental income of that area then:

use the rental income and work backwards, to work out the max value of the house so that if i got an interest only mortgage how much could i pay before i hit my break even point so that rent only just covered the interest only mortgage. If houses are higher priced than that, id say it was a big risk to buy that house as its clearly over valued.

the multiples that can borrow cant keep going up. now its about 5 times your salary that you can borrow max at crazy banks who just want to own you for life.

if it goes up again it might go to 6, but then we are talking about effectivly renting as you will never ever pay off your mortage!

I feel for some of the kids on the housing market now, its virtually impossible to buy. My friend who graduated with me is just gettin on the the market now and he is really struggling to meet the mortgage payment. took him two years to save the deposit, its pretty harsh out there.

granville_2

Generali wrote: »

It's hard to get your head around but that is really how it works.

An example (with 10% reserves):

1. You win £10,000 on a horse (from a bet you made using a free introductory offer - this is MSE after all) and put that money in your savings account.

2. The bank then lends £9,000 to someone wanting to build an extension on their house. The builder puts that money into his bank account.

3. The builder's bank can then lend £8,100 of the £9,000 to someone (keeping 10% in their reserves).

And so it goes on. In just 2 loans, the £10k you earned has become £17,100 in debt and you've still 'got' your £10k!

Fractional reserve banking is viewed by some people as a massive fraud perpetrated by the government and banks on their own people. I see that as a little strong, personally.

how about calling it a Ponzi scheme?

http://en.wikipedia.org/wiki/Ponzi_scheme

which is probably how you could descibe the current UK housing market?

Jonesya

Melissa177 wrote: »

This money is being created by us. Think about what you do for a living, and where you create the money for whichever company you work for (unless you work for the government!)

Which is why I am currently worried by the number of people working for the government in one form or other in this country - none of these people are in welath creating roles, which we need to sustain the economy and grow it.

That's incorrect, wealth is created by people producing useful goods and services. I think on the whole the private sector probably does that more efficiently than the public sector (competitive forces etc) but you can't deny that the public sector does produce valuable services - NHS, education, fire-service, roads/highways, waste disposal etc.

A teacher produces generates roughly the same 'wealth' whether they work in a private school paid for by the parents or a state school paid out of general taxation.

Generali

rizla01 wrote: »

If the old rules still apply then increases in amounts of ANYTHING, including money will render that commodity weaker than before.

More money, yes, but watered down in it's potency, surely.

If everyone has got more of it then it'll carry less weight with regards to buying power Etc.

Now imagine the result of this happening?

Product prices will shoot sky high but quality will drop to an all time low. The resulting value of money will be a lot lower as a consequence.

Or is that a too-simplistic view.

That is inflation - more money, same number of goods means the goods cost more money or in other words the money is worth less.

And that, in my opinion, is exactly what is going on now. At the moment, the increasing money supply is being thrown at assets so the price of them is rising. Eventually that money will (and I think it's already started to) escape from the confines of asset markets and start to increase the price level more generally. Then we'll see what the MPC does.

Raise rates to slay the inflation dragon and burst the credit bubble? They'll have to eventually. At that point you'd better not be working for one of the firms loaded up to the eyeballs with debt by the private equity guys or be looking for your house to increase in value to allow your financial sums to add up.

Melissa177

Incidentally, if you think house prices are high here, I've just been looking at flats in Geneva (company relocation looks likely). The prices are even worse! :eek: