No country for young men — UK generation gap widens

setmefree2

N1AK wrote: »

b) the houses they need to buy themselves cost more as well

There are 2 elements to the cost of a house.

1)The amount you actually pay for it.

2)The interest that you pay on it over the 25 years of your mortgage.

Interest rates have never been so low, for so long.

Whilst the amount that boomers actually paid in market value for houses may have been lower - the amount they paid in interest over 25 years was much higher. So the cost of owning a home was higher than you think.

Over 25 years the interest you pay on your mortgage really adds up. We have been mortgage free since 2012. Over the 25 years we had a mortgage we owned three properties. In total we paid to the mortgage company £250,000 for the repayment of capital loaned to us and £148,000 in interest. So, nearly 40% of the cost of our home was interest.



So really if interest rates are low is it any surprise that house prices rise?

If you want to go back to the good old days - would you really enjoy the good old days interest rates?

Physics

setmefree2 wrote: »

There are 2 elements to the cost of a house.

1)The amount you actually pay for it.

2)The interest that you pay on it over the 25 years of your mortgage.

Interest rates have never been so low, for so long.

If you're going to cost the value of a 25 year loan, wouldn't it be more appropriate to do it in real rather than nominal costs?

setmefree2

Physics wrote: »

If you're going to cost the value of a 25 year loan, wouldn't it be more appropriate to do it in real rather than nominal costs?

Why?

House 1
Cost £100,000
int 5% 25 years £75, 377
Total Cost £175,377

House 2
Cost £65,000
int 10% 25 years £112,198
Total Cost £177,198

The houses cost the same.

The monthly repayment on House 1 is £584.59 on House 2 £590.66. Essentially the same.

Physics

Why measure in nominal costs?

Because I'll be a lot happier if I mortgage at 10% while inflation runs at 9%, than if I mortgage at 3% while inflation runs at 1%. As an example.

setmefree2

Physics wrote: »

Why measure in nominal costs?

Because I'll be a lot happier if I mortgage at 10% while inflation runs at 9%, than if I mortgage at 3% while inflation runs at 1%. As an example.

I'm arguing that Boomers didn't necessarily get their houses that cheap if you just look at interest rates as well as market value - I don't understand what your point is?

Graham_Devon

setmefree2 wrote: »

I'm arguing that Boomers didn't necessarily get their houses that cheap if you just look at interest rates as well as market value - I don't understand what your point is?

I doubt anyone, boomer or not, had a single mortgage running for 25 years on the same house and paid 10% average interest rates over the life of the loan.

setmefree2

Graham_Devon wrote: »

I doubt anyone, boomer or not, had a single mortgage running for 25 years on the same house and paid 10% average interest rates over the life of the loan.

Of course not Graham - I'm merely illustrating a point.

ukcarper

setmefree2 wrote: »

Of course not Graham - I'm merely illustrating a point.

Saying that between 1972 and 1992 interest rates were above 10% most of the time and easily averaged above 10%.

Loughton_Monkey

Physics wrote: »

Why measure in nominal costs?

Because I'll be a lot happier if I mortgage at 10% while inflation runs at 9%, than if I mortgage at 3% while inflation runs at 1%. As an example.

What if the above two scenarios are both true, but that house price inflation were to have been 5% and 6% respectively?

From a totally economic viewpoint, buying a house (on a mortgage) is merely a "leveraged investment". That is you 'invest' some of your own money, and borrow even more to buy even more of the same investment. Provided the growth value in the house exceeds the cost of servicing the loan, you're a winner.

Someone buying a couple of years ago on, say, a 4% mortgage should be swishing the Champagne with HPI of about 18%. Only the 'toasties' of this world whinge in their gripe water complaining of paying interest at twice the rate of inflation.

Physics

setmefree2 wrote: »

I'm arguing that Boomers didn't necessarily get their houses that cheap if you just look at interest rates as well as market value - I don't understand what your point is?

I'm saying that costs of borrowing heavily depend on inflation rates at the same time as interest rates. That's why I said to use real rates, rather than nominal ones.

The notion that real interest rates, not nominal ones, is important when assessing actual costs is not particularly controversial.

Here's a FT post that explains the concept fairly well (and as the comments point out: this is just rediscovering that real interest rates are the important factor).

Given that the 70s/80s had significantly higher inflation than today, it's not a fair assessment to look at nominal interest rates alone.