A warning to first time buyers

grizzly1911

HAMISH_MCTAVISH wrote: »

Housing market activity is responsible for somewhere around 15% of GDP in most developed economies. That still leaves 85% of GDP being created from other things.



.

If GDP is falling then simply increasing house related GDP in relation to the total will at some point become unsustainable. If that other 85% isn't growing but deflating then the problem compounds.

Without real growth the housing merry go round won't spin forever.

michaels

shortchanged wrote: »

Crippled because it's overpriced aided by numerous props.

The UK housing market is looking more and more like the Eurozone with plenty of can kicking going on.

OK

I contend that whilst house price to earnings is a useful rule of thumb ratio what actually matters is the proportion of take home pay spent on interest and repayments over the life of the mortgage.

So if over a 25/30 year period interest rates are a couple of percent lower on average, then mortgages and thus house prices can be higher relative to gross incomes.

A much simplified example: suppose a 100k mortgage is paid off over 30 years.
Scernaio 1 average interest rate payable over the term is 6%, annual payment 100,000/30 = 3,333 capital plus 6,000 interest = 9,333
Scenario 2 average interest rate payable over the term is 4%
100,000/30 = 3,333 capital plus 4,000 interest = 7,333

IN scenario 2 the mortgae could increase to 127,500 to leave the same total amount payable each year
127,500/30 = 4,250 capital plus 5,100 interest = 9,350

So house prices 27% higher can be supported by the same income if interest rates are premanantly 2% lower. In terms of price to income multiples if the ratio under 6% rates was 3.5x this would mean that under 4% rates it could be 4.5 times with no impact on affordability.

shortchanged_2

michaels wrote: »

So house prices 27% higher can be supported by the same income if interest rates are premanantly 2% lower. In terms of price to income multiples if the ratio under 6% rates was 3.5x this would mean that under 4% rates it could be 4.5 times with no impact on affordability.

But how can you guarantee permanently lower interest rates?

Apparantly the BoE's remit on setting interest rates does not factor in house prices. :whistle:

This is just pie in the sky stuff and the sort of mentality that creates problems in that there is no concept of future risk.

grizzly1911

michaels wrote: »

OK

I contend that whilst house price to earnings is a useful rule of thumb ratio what actually matters is the proportion of take home pay spent on interest and repayments over the life of the mortgage.

So if over a 25/30 year period interest rates are a couple of percent lower on average, then mortgages and thus house prices can be higher relative to gross incomes.

A much simplified example: suppose a 100k mortgage is paid off over 30 years.
Scernaio 1 average interest rate payable over the term is 6%, annual payment 100,000/30 = 3,333 capital plus 6,000 interest = 9,333
Scenario 2 average interest rate payable over the term is 4%
100,000/30 = 3,333 capital plus 4,000 interest = 7,333

IN scenario 2 the mortgae could increase to 127,500 to leave the same total amount payable each year
127,500/30 = 4,250 capital plus 5,100 interest = 9,350

So house prices 27% higher can be supported by the same income if interest rates are premanantly 2% lower. In terms of price to income multiples if the ratio under 6% rates was 3.5x this would mean that under 4% rates it could be 4.5 times with no impact on affordability.

I accept the point you are making.

Interest will be repayable on an average balances not the whole balance during the term of the mortgage so scenario 2) is closer to 85% of 1.) not 78% as per your example.

It it base on interest rates being low for the whole 30 years, how could this be maintained without constant intervention?

It is also reliant on pay increasing greater than inflation otherwise the proportion of real disposable income spent on the mortgage (current affordability test) will increase.

wotsthat

shortchanged wrote: »

Apparantly the BoE's remit on setting interest rates does not factor in house prices. :whistle:

So we've got an article saying prices are too high but the government are determined not to let them fall.

You seem also to imply that the BoE is going to maintain low rates to keep prices high.

What should a potential FTB do?

marathonic

wotsthat wrote: »

It's fairly well established that when prices are rising homeowners spend more money because they feel wealthier. They don't have to sell their house.

It's not that complex but the misinformed generally start talking about using the house as a cash machine or stacking up more debt. Unfortunately they can't comprehend that more spending doesn't have to mean more debt.

Agreed!

For example, any financially savvy person on a 5-year fixed rate mortgage where their LTV is above 60% may decide to hold off on spending so that, come remortgage time, they will be able to get better rates available at the time.

If their LTV drops below 60%, they no longer need to save as the best-buy rates are already available to them.

Through a combination of the lower interest rate on their mortgage due to the low LTV and a reduction in the requirement to save, they're able to lossen their budget a little.

The 60% LTV can come through capital repayments, price rises or a combination of the two.

grizzly1911

wotsthat wrote: »

So we've got an article saying prices are too high but the government are determined not to let them fall.

You seem also to imply that the BoE is going to maintain low rates to keep prices high.

What should a potential FTB do?

Buy? If they need somewhere to live, they can afford it and TCO is comparable to any other accommodation costs.

Like anything need trumps timing.

neilem

If house prices aren't too expensive, then why is the government using props and schemes to help buyers buy something they cannot otherwise afford?

Graham_Devon

neilem wrote: »

If house prices aren't too expensive, then why is the government using props and schemes to help buyers buy something they cannot otherwise afford?

Because they are just jolly nice people.

Others will suggest that the government is having to as the banks are not "doing their job". However, theres the other side of that coin....if the banks think it's too risky, is it the job of the taxpayer to take on the risk of providing loans to riskier people?

Unfortunately it just goes around in circles. However, your point is correct. If house prices were affordable, we wouldn need to invent ways for people make them so.

shortchanged_2

neilem wrote: »

If house prices aren't too expensive, then why is the government using props and schemes to help buyers buy something they cannot otherwise afford?

This is the most obvious statement that the property rampers on here turn a blind eye to.

It is absolute common sense to say if there are any forms of market interventions i.e schemes, that 'help' people buy a property then simply property is overpriced.