Asking prices up 3% in a month according to June rightmove report ...

HAMISH_MCTAVISH

Graham_Devon wrote: »

You are right when you look soley at the last couple of decades.

I can only argue the situation as it relates to the facts today.

In the environment as it exists now, lack of credit is the main factor in stopping enough houses being built, planning permission is also a factor, but at current build rates there's about a 3 year supply of plots with permission.

We can clearly see that supply over the last 60 years has not been solely credit driven.

Sure.

I don't for one minute argue with the point that if the government built hundreds of thousands of prefab houses as they did after WW2 then supply would increase and the pressure on prices would reduce.

Or if we embarked on a major council housing programme, or whatever, that we could increase supply.

But none of those things are remotely likely to happen today or in a time frame short enough to help the current generation.

The crisis is now, the need for housing is now, and the solution has to be implemented quickly.

A huge part of that solution is going to include private sector house building, and the restrictions on mortgage lending are the main cause of that house building falling off a cliff to 100 year lows after 2007, and still not recovering.

HAMISH_MCTAVISH

mwpt wrote: »

We are purely examining what the cost of credit doe to prices all other things being equal (because I'm challenging your assertion that supply/demand is the only factor).

The cost and availability of credit are just components of effective demand, and at the moment the cost of credit is an incredibly tiny component of effective demand, as mortgage affordability is being stress tested to well above current levels.

The price of credit being, for example 3%, is an irrelevance when affordability is stress tested to 7% before a mortgage will be issued.

So given people are not buying houses today based on affordability calculated at 2% or 3% or 4% mortgage rates, but rather 7% mortgage rates, then increasing mortgage rates to 6% will have virtually no impact at all on prices.

In a world without a supply shortage reducing the cost of credit would have precisely zero impact on prices.

So it really is always all about the imbalance between supply and demand, and while I will agree that price/availability of credit are a component of demand, in today's world the price of credit is having a tiny (if any) impact in it's role as a component of demand.

mwpt

HAMISH_MCTAVISH wrote: »

The cost and availability of credit are just components of effective demand, and at the moment the cost of credit is an incredibly tiny component of effective demand, as mortgage affordability is being stress tested to well above current levels.

The price of credit being, for example 3%, is an irrelevance when affordability is stress tested to 7% before a mortgage will be issued.

So given people are not buying houses today based on affordability calculated at 2% or 3% or 4% mortgage rates, but rather 7% mortgage rates, then increasing mortgage rates to 6% will have virtually no impact at all on prices.

I think you know this is untrue. 5 year fix or above is not subject to MMR. I bought last year, I was sensible and did my own stress testing and could afford repayments at interest rates of upward of 7%. However, if interest rates were at 6%, I would have offered 40% less for my house. Because otherwise it would make no sense at all to buy it, renting would be, by far, a better financial decision. Most people would do the same, and some would not even be able to afford repayments.

In a world without a supply shortage reducing the cost of credit would have precisely zero impact on prices.

Yes but we don't live in a world without a supply shortage. We have finite land and constraints on building. Supply determines that prices will increase, credit determines by how much.

HAMISH_MCTAVISH

mwpt wrote: »

I think you know this is untrue.

Absolutely not.

5 year fix or above is not subject to MMR.

I understand most lenders apply the same affordability test to it anyway in anticipation of the new European rules coming in.

I bought last year, I was sensible and did my own stress testing and could afford repayments at interest rates of upward of 7%. However, if interest rates were at 6%, I would have offered 40% less for my house.

You could offer what you like, but chances are nobody would sell to you at that price and you wouldn't have bought a house.

Because otherwise it would make no sense at all to buy it, renting would be, by far, a better financial decision. Most people would do the same, and some would not even be able to afford repayments.

The average rental yield is around 5.2%, and the average FTB mortgage is around 80% LTV, I am curious as to why you think renting is a better financial decision in terms of lifetime housing costs if rates rise to 6%?

My calculations indicate buying is still, by far, the cheaper lifetime housing option, even with rates of 6%+, and even with prices well above today's levels.

Yes but we don't live in a world without a supply shortage. We have finite land and constraints on building. Supply determines that prices will increase, credit determines by how much.

The land issue is a red herring, just 1.1% of the UK is currently used for residential housing, and there really is no shortage of land.

Planning constraints can be changed at the stroke of a pen whenever the political will is discovered to do so, and there is already a 3 year supply of plots with permission.

The real blockage is the access to finance....

lisyloo

The real blockage is the access to finance....

Are you saying developers can't borrow?
So why aren't they selling houses off plan?

mwpt

HAMISH_MCTAVISH wrote: »

You could offer what you like, but chances are nobody would sell to you at that price and you wouldn't have bought a house.

So who is going to buy this house paying an extra £1000 pm rather than renting the same house? See below.

The average rental yield is around 5.2%, and the average FTB mortgage is around 80% LTV, I am curious as to why you think renting is a better financial decision in terms of lifetime housing costs if rates rise to 6%?

My calculations indicate buying is still, by far, the cheaper lifetime housing option, even with rates of 6%+, and even with prices well above today's levels.

Well, since I lived in SW London, we can examine 2 bed flats in Wimbledon where I initially looked at buying. Crappy ones are at a lower end of £450k. Decent places upward of £550k. I can rent that same flat for around £1600 pm (I actually rented for less than that but just giving rightmove averages currently).

At 2% mortgage rate, 20% deposit, 30 year term, that £550k flat has repayments of ~£1650 pm. I take a HPI value of 2% in line with inflation and rental inflation the same. I assume 5% returns on money elsewhere (not part of this debate).

So, with those variables, my spreadsheet shows me it makes sense to buy. I take an arbitrary income value, plug it in, and spreadsheet shows difference in total equity (house value + savings) after 10 years up £117k vs renting, up £513k after 30 years.

So now set interest rates at 6% keeping everything else the same. Suddenly my repayments are ~£2650 pm which is a massive difference of £1000 vs renting. My immediate thoughts are, 1) I'd be mad to make that investment unless I thought HPI was going to be huge 2) could I even afford to pay that?

But immediate thoughts aside, what does my spreadsheet show? It shows that difference in total equity having bought under those conditions is now, -£82k after 10 years, and -£305k after 30 years. I could have rented for 30 years, bought the same house at the end, and saved myself £305k.

Simplistic models but I bet most people don't even do that. They just know "can't lose in bricks and mortar" and they look at what they can afford each month at current rates and mostly ignore the actual cost of the asset.

michaels

HAMISH_MCTAVISH wrote: »

The land issue is a red herring, just 1.1% of the UK is currently used for residential housing, and there really is no shortage of land.

Planning constraints can be changed at the stroke of a pen whenever the political will is discovered to do so, and there is already a 3 year supply of plots with permission.

The real blockage is the access to finance....

I don't think the land issue is a complete red herring, there is a reason prices are higher in central London than the commuter towns outside London, people offset transport costs and convenience against price and there is not enough land available in central London for new build to counteract this.

And I suspect that even without any change in financing availability if 10,000 plots were made available for building on the Green Belt land arround the town I live in people would find the money to buld on them even if the land was charged at 4x it's value as farmland.

cells

michaels wrote: »

I don't think the land issue is a complete red herring, there is a reason prices are higher in central London than the commuter towns outside London, people offset transport costs and convenience against price and there is not enough land available in central London for new build to counteract this.

And I suspect that even without any change in financing availability if 10,000 plots were made available for building on the Green Belt land arround the town I live in people would find the money to buld on them even if the land was charged at 4x it's value as farmland.

Hamish thinks mortgage availability determines build rates so much more than anything else that its pretty much the only factor determining build rates


he does not accept or want to think about or debate the fact that there are hundreds of councils in england with a hugely varying build rates. The only variable between the councils is the number of stamps they issue so that must be the major factor.

how the hell can a builder build more homes if the council specifically says they are only going to give out on average 400 stamps a year?

HAMISH_MCTAVISH

mwpt wrote: »

Well, since I lived in SW London, we can examine 2 bed flats in Wimbledon where I initially looked at buying. Crappy ones are at a lower end of £450k. Decent places upward of £550k. I can rent that same flat for around £1600 pm (I actually rented for less than that but just giving rightmove averages currently).

At 2% mortgage rate, 20% deposit, 30 year term, that £550k flat has repayments of ~£1650 pm. I take a HPI value of 2% in line with inflation and rental inflation the same..

*sigh*

That's London, and not just London but a tiny sub-set of London with unusually low rental yields, I could just as easily give you examples of flats in Aberdeen where rent is £1200 and the cost to buy is c. 200K.

But putting that aside for a moment, neither of these extremes are typical of the average in the UK, and even if they were your figures and assumptions look a tad suspect to me.

I've plugged those numbers (Purchase Price = £550000, Interest = 6.0%, Deposit = 20%, Term of Loan = 25 years, You expect to live here = 25 years, Monthly Rent = £1600, Rent Rate Increase = 2%, Expected House Price Inflation = 2%) into a rent/buy calculator and it comes out as follows:

Renting:
-Rental Payment at the end of 25 years: £2,573.50
-Total Payments: £622,481.75 over 25 years
- Debt paid off: £0
- Profit on leaving: £0

- Total Spent: £622,481.75*

Buying:
-Mortgage Payment at the end of 25 years: £2,834.93
-Total Payments: £850,477.85 over 25 years
- Debt paid off: £440,000.00
- Profit on Sale: £352,333.30

- Total Spent: £58,144.55

And that is only over the comparatively short term of a mortgage, when you look at lifetime housing costs from a buy/rent perspective, which is what I actually said, the numbers get even bigger in favour of buying.

Over 50 years of residency with a 25 year mortgage term, and your numbers as above, the buyer is £3,272,928 better off than the renter.**




*I'm not ignoring your 5% assumption on the deposit, it equates to roughly 400K compounded over 25 years, but it's highly suspect that such returns are achievable consistently in a low inflation world, and your numbers for both HPI and Rent Inflation are both indicative of low inflation at only 2% nominal.... but regardless still leaves the buyer better off.


** And again, that is based on a set of assumptions regarding both HPI and rent inflation that are likely to be unrealistically low, if you plug in 5% nominal instead of 2%, the difference jumps to £10,000,000 better off for the buyer over 50 years.

chucknorris

mwpt wrote: »

Simplistic models but I bet most people don't even do that. They just know "can't lose in bricks and mortar" and they look at what they can afford each month at current rates and mostly ignore the actual cost of the asset.

The spreadsheet that I used to use (I am no longer interested in property investment) considered the following:

-mortgage interest
-fees
-rent
-voids (minimal)
-furniture
-initial upgrading work
-inflation
-known periodical maintenance (gas safety, redecoration etc.)
-allowance for unknown maintenance (roof repairs etc.)
-allowance for white good replacements
-10 year events (kitchen/bathroom refurbs etc.)
-capital gains tax