MILLIONS of Young People WANT & NEED Higher House prices!!!

Physics

So it turns out that borrowing money to take on massively leveraged investments can produce huge gains when they increase in value, but does nothing for you when they don't.

CLAPTON

Physics wrote: »

So it turns out that borrowing money to take on massively leveraged investments can produce huge gains when they increase in value, but does nothing for you when they don't.

if it's an owner occupied property, it also provides a home and avoids paying rent

HAMISH_MCTAVISH

N1AK wrote: »

A weak example, which says something as it's about as strong an example as could be made!

Firstly the first 5 years on the mortgage will pay off more 2% of the mortgage, around 20% on a 20 year mortgage. Not that I'm shocked that you'd understate it by an order of magnitude to falsely fit it to your position.

*sigh*

Taking our earlier example of Nick, a 100K house with a 10% deposit leaves a mortgage of 90K.

As young Nick only had a 10% deposit 5 years ago, he's paying a rate of 5.5%.

Based on a 25 year repayment mortgage, his current balance would be £80,159.

"Aha" you say, "so Hamish did understate the position by an order of magnitude"......

Errr..... No.

I specifically stated I was including transaction costs, so selling, buying, moving and stamp duty on the new place. Plus the arrangement fee for any new mortgage products.

Now I'm going to guess that selling costs with an EA, advertising, solicitors fees, buying costs, moving costs, and stamp duty would be in the order of 5-8K.

It might be at the lower end of that spectrum if all goes well.

It might be at the higher end if there are complications, or the house has to be repeatedly advertised, or what have you.

I allowed for the higher end, if it does end up at the lower end then 'Nick' benefits, but it doesn't remotely change the point behind the example.

If he can afford the larger mortgage on the larger property then he can also likely increase his capital during the intervening 5 years. .

No, wrong again.

He's been stuck paying a high rate for a high LTV mortgage, which means his savings will be minimal.

However getting to the 25% LTV threshold thanks to that lovely bit of HPI, means he now pays a much lower rate on the new mortgage than he was before.

It's entirely possible his payments could reduce, despite the bigger mortgage.

Even if your argument wasn't false.

It isn't....

You also ignore the consequences of the change:

Nope.

He's also borrowing £9k more to buy the bigger house,

But paying less interest.

paying more stamp duty

,

Allowed for that in transaction costs.

and paying interest on the lot..

At a lower rate than he was previously.

Like it or not, in today's world of constrained lending with a focus on LTV, the increase in equity from HPI makes many people able to move house that could not previously.

HPI rapidly changes LTV percentages, which is critical to many.

ruggedtoast

HAMISH_MCTAVISH wrote: »

*sigh*

Taking our earlier example of Nick, a 100K house with a 10% deposit leaves a mortgage of 90K.

As young Nick only had a 10% deposit 5 years ago, he's paying a rate of 5.5%.

Based on a 25 year repayment mortgage, his current balance would be £80,159.

"Aha" you say, "so Hamish did understate the position by an order of magnitude"......

Errr..... No.

I specifically stated I was including transaction costs, so selling, buying, moving and stamp duty on the new place. Plus the arrangement fee for any new mortgage products.

Now I'm going to guess that selling costs with an EA, advertising, solicitors fees, buying costs, moving costs, and stamp duty would be in the order of 5-8K.

It might be at the lower end of that spectrum if all goes well.

It might be at the higher end if there are complications, or the house has to be repeatedly advertised, or what have you.

I allowed for the higher end, if it does end up at the lower end then 'Nick' benefits, but it doesn't remotely change the point behind the example.



No, wrong again.

He's been stuck paying a high rate for a low LTV mortgage, which means his savings will be minimal.

However getting to the 25% LTV threshold thanks to that lovely bit of HPI, means he now pays a much lower rate on the new mortgage than he was before.

It's entirely possible his payments could reduce, despite the bigger mortgage.



It isn't....



Nope.



But paying less interest.

,

Allowed for that in transaction costs.



At a lower rate than he was previously.

Like it or not, in today's world of constrained lending with a focus on LTV, the increase in equity from HPI makes many people able to move house that could not previously.

HPI rapidly changes LTV percentages, which is critical to many.

Can you do a shared ownership illustration?

the_flying_pig

HAMISH_MCTAVISH wrote: »

*sigh*

Taking our earlier example of Nick, a 100K house with a 10% deposit leaves a mortgage of 90K.

As young Nick only had a 10% deposit 5 years ago, he's paying a rate of 5.5%.

Based on a 25 year repayment mortgage, his current balance would be £80,159.

"Aha" you say, "so Hamish did understate the position by an order of magnitude"......

Errr..... No.

I specifically stated I was including transaction costs, so selling, buying, moving and stamp duty on the new place. Plus the arrangement fee for any new mortgage products.

Now I'm going to guess that selling costs with an EA, advertising, solicitors fees, buying costs, moving costs, and stamp duty would be in the order of 5-8K.

It might be at the lower end of that spectrum if all goes well.

It might be at the higher end if there are complications, or the house has to be repeatedly advertised, or what have you.

I allowed for the higher end, if it does end up at the lower end then 'Nick' benefits, but it doesn't remotely change the point behind the example.



No, wrong again.

He's been stuck paying a high rate for a high LTV mortgage, which means his savings will be minimal.

However getting to the 25% LTV threshold thanks to that lovely bit of HPI, means he now pays a much lower rate on the new mortgage than he was before.

It's entirely possible his payments could reduce, despite the bigger mortgage.



It isn't....



Nope.



But paying less interest.

,

Allowed for that in transaction costs.



At a lower rate than he was previously.

Like it or not, in today's world of constrained lending with a focus on LTV, the increase in equity from HPI makes many people able to move house that could not previously.

HPI rapidly changes LTV percentages, which is critical to many.

commonly overheard conversation in the Aberdeen area.

'did you see that house prices have gone up again this year?'

'aye, wonderful news. supply and demand, innit'.

'agreed... the only thing is I regret buying when i did last year. if i'd only held my nerve and waited, i could have got my new house for a lot more'.

'aye, well... fortune favours the brave i suppose'.

the_flying_pig

seriously, i mean, yes, it's possible to construct examples whereby HPI benefits a trader-upper in the short term.

HPI will mean that a trader-upper faces lower initial mortgage repayments in situations where:

(a) their initial LTV was higher than the current average of about 80%;
(b) they've not paid off much of a chunk of their earlier mortgage, e.g. because they were on interest only or because they haven't been in the home all that long, maybe because the interest rates they're paying are very high;
(c) like now we're in a near-zero interest rate environment whereby the premium that you pay for having high LTV [say about 1.5% for the move between 90% & 80% LTV, petering down to about 0.3% for teh move between 70% % 60%, with no savings for lower LTVs than that] is very high as a percentage of the base rate; and
(d) their earnings have increased and/or are high enough that the higher debt they'll need to take on as a result of HPI doesn't cause them to run into lender salary multiple constraints. this is far from a given. i should think that anyone who would genuinely struggles to pay off a mortgage at the highest LTV rates that are currently around [say, what, 5% or so??] must either have very high outgoings or be borrowing at around 4+ times their salary. HPI would by definition push their need to borrow north of this 4+ times.

but even this result, which depends on some very particular assumptions, only applies to initial mortgage payments. by the time they come to remortgage, they'll already have started to move down the LTV bands due to teh combined effect of inflation and of the repayments that they've made. it is literally impossible that HPI before a person trades up can reduce his or her mortgage repayments over their lifetime. unless he/she dies very very quickly.

thequant

the_flying_pig wrote: »

seriously, i mean, yes, it's possible to construct examples whereby HPI benefits a trader-upper in the short term.

HPI will mean that a trader-upper faces lower initial mortgage repayments in situations where:

(a) their initial LTV was higher than the current average of about 80%;
(b) they've not paid off much of a chunk of their earlier mortgage, e.g. because they were on interest only or because they haven't been in the home all that long, maybe because the interest rates they're paying are very high;
(c) like now we're in a near-zero interest rate environment whereby the premium that you pay for having high LTV [say about 1.5% for the move between 90% & 80% LTV, petering down to about 0.3% for teh move between 70% % 60%, with no savings for lower LTVs than that] is very high as a percentage of the base rate; and
(d) their earnings have increased and/or are high enough that the higher debt they'll need to take on as a result of HPI doesn't cause them to run into lender salary multiple constraints. this is far from a given. i should think that anyone who would genuinely struggles to pay off a mortgage at the highest LTV rates that are currently around [say, what, 5% or so??] must either have very high outgoings or be borrowing at around 4+ times their salary. HPI would by definition push their need to borrow north of this 4+ times.

.

Sums up perfectly the position of a young house buyer, I think you have beaten Hamish to the best explanation as to why young homeowners should be demanding higher HPI.

Generali

N1AK wrote: »

It isn't. But just about anyone looking to step up the ladder, other than those in negative equity, isn't benefited by price increases.

Someone who owns a £150,000 house with £50k equity, who wants to buy a £300,000 house for example.

Currently they have ~16% deposit and need to borrow £250,000 paying £5,000 stamp duty (new system).

If prices increased 20% then they'd have £80k equity, which is a 22% deposit. They need to borrow £280,000 (£30k more) and pay £8,000 stamp duty (£3k more).

So getting 4% larger deposit on the new property will cost them ~£43k (£30k extra mortgage, £10k interest and £3k stamp duty).

If prices didn't increase they could get 4% more deposit by saving £12k, including debt paid off on current mortgage which is likely around £6k pa. So 2 years if they didn't save a penny beyond mortgage payments.

Lots of assumptions in there.

What we can say from the early 90s and the GFC is that when house prices fall, the young and those with very small deposits are the ones locked out of the market.

Gangaweed

I see Chucky has returned.

Spidernick

Thanks for the comprehensive replies, Hamish and much to consider (note I did say 'if' prices rise at a uniform rate precisely because I realise that is often not the case). However, surely at the end of the day, whatever the interest position (and if people can afford a bigger mortgage, wouldn't it make sense to overpay on their existing mortgage and then remortgage at a better rate once their LTV ratio has improved?), surely as people are having to borrow more capital than they otherwise would when house prices rise if they are moving up the ladder, this cannot really be a good thing in the long run?

I suppose we are coming at it from different perspectives, but personally I would rather pay down the existing mortgage faster or save the deposit for the next property up (at a price that is not forever moving upwards and potentially making the purchase out of reach). I do see where you're coming from though. Cheers.