**Don't Buy A House** House Prices Set To Crash!!!

mkdoodle

To put it another way: What proportions of peoples incomes are being spent on mortgages? If you look at CHART 4 on this PDF it becomes instantly clear why there was a crash in the 1980s and will not be one now.

“Chart 4” appears quite convincing, but it’s deceptive in that it only addresses interest payments. Capital has to be repaid too, one way or another, and capital repayments are more important in a low-interest rate environment than a high-interest rate environment. Even in 1990 there wasn’t much talk of 50-year mortgages, or of mortgages guaranteed by parents, outside of pre-crash Japan. Mortgages were unknown longer than 25 years. I’d like to know also what a “typical household” is.

Also I think it’s dangerous to assume the permanence of low interest rates. AIUI low mortgage rates exist only as long as the Chinese and Japanese central banks are willing to use their countries’ balance of payments surpluses to buy American and British debt. It’s possible that mortgage rates will rise, even as inflation falls, because they will depend on whether the Chinese and Japanese buy or sell our debt.

Not only are consumers in debt, now the government is borrowing and taxing more to create public sector jobs. That too is likely to put pressure on mortgage rates and affordability.

lisyloo

I don't believe chart 4 as I've seen analyses of these figures before which show that we are getting close to the 1988/1989 peak.

I can't pinpoint exactly what's wrong with it because they haven't stated their methodology for it.

One difference that existed prior to 1990 was MIRAS which definitely needs to be taken into account.
My guess is that they have just calculated straight interest costs and not added in MIRAS.

Affordability is currently at it's limits and close to 1989 levels.

I don't accept this graph as correct.

If anyone want further analysis (with the methoology backed up) then let me know and I can provide links.
Alternatively go an search the property market and trends boards the the motley fool website.
Where people have done analysis they are willing to state how they have come by their figures so you know what they have taken into account.
No so with this graph which is complete rubbish in my view.

Reaper

While the internet is awash with "affordability" graphs which show prices v income it is very hard to find any which also include interest rates - crucial in my opinion. Hence why I provided the property developer link I did.

I have searched further and found a more respectable source, although it was published back in May. It is by the Council of Mortage Lenders. Take a look at Chart 1 in this pdf.

Now before you all jump up and down pointing to chart 2 please note it excludes the 80s boom, which is a shame as it could have been useful.

Lisyloo - if you want to post a link to graphs or figures which include price/income/interest I'd be only too happy to take a look.

lisyloo

Lisyloo - if you want to post a link to graphs or figures which include price/income/interest I'd be only too happy to take a look.

I can certainly find a link.
I can't guarantee it has everything you want but I know the person I am thinking of makes a point of including MIRAS to make a fair comparison of what people are actually spending NOT what the interest costs.

lisyloo

Here is a link to an interesting thread.
You might have to sign up to Motley fool but it's free

http://boards.fool.co.uk/Message.asp?mid=8709132&sort=whole

Will paste the important ones here.
If you want to see it in a graph then cut & paste into excel (sorry I don't have time right now).

year % income
1984 19.49%
1985 20.62%
1986 20.64%
1987 18.23%
1988 22.73%
1989 25.73%
1990 26.73%
1991 22.58%
1992 18.54%
1993 17.06%
1994 17.49%
1995 18.05%
1996 16.75%
1997 18.51%
1998 18.29%
1999 17.84%
2000 19.22%
2001 17.03%
2002 17.81%
2003 19.99%
2004 23.03%

I think this is much nearer the mark personally.

lisyloo

Also at the bottom here is a graph from Deloitte

http://www.propertyfacts.co.uk/pricetrend/pricetrends.htm

The blue line shows the Nationwide house prices to earnings ratio going higher than the last peak.

lisyloo

I have searched further and found a more respectable source, although it was published back in May. It is by the Council of Mortage Lenders. Take a look at Chart 1 in this pdf.

Chart 1 does not include the last 5 interest rate rises !!

I would say that's a very important factor in the housing market at the moment.

t_i_g_e_rr

For what they're worth, a few of my thoughts…

I would say that the big difference between this time (if it happens) and last time (end of the 80’s) is that there is no single trigger to make the market do an about turn like MIRAS did. This time it will probably be investors not buying, or possibly beginning to sell. This would be as a result of no return on investment or better returns elsewhere (e.g. stock market, or even savings accounts if interest rates rise any more). This makes it difficult to predict when (or maybe if) it will happen and by how much. How many investors would choose to pull out? There are a lot of contributing factors to take into account. It isn’t as simple as last time!

I also think that in the present climate, the lack of supply and high demand won't help prop up the first time buyers market. Most people consider a car essential, but if the only cars available started at £100,000 'first time buyers' would have no choice but to put up with the bus. I think the housing market is similar. If investors stop buying houses, most first time buyers won't start buying until the prices become affordable to them.

t_i_g_e_rr

mkdoodle

From the Nationwide's October 2004 house prices review:

<<
***STRICTLY EMBARGOED UNTIL 7.00AM THURSDAY 28 OCTOBER 2004***
Price slowdown intensifies
• First decline in UK property prices for three years
• UK property prices flat over last three months
• Strength of labour market suggests housing market to tread water

The private rented stock grew by 8,000 between March 2002 and March 2003, compared with an increase of 223,000 for owner-occupied property over the same period. The increase in the owner-occupied stock is partly explained by new build, which in the year to March 2003 totalled 124,000 private enterprise completions. “Despite the private rented stock increasing by just 8,000, the number of outstanding buy-to-let mortgages increased by 100,000 over broadly the same period (from 233,000 in the first half of 2002 to 333,000 a year later). Given that there are also cash purchases of rented property on top of new buy-to-let mortgages, it appears that there has been some substitution of ownership. Large corporate holders of private rented properties appear to have sold up to private smaller scale investors. However, part of the increase in the number of buy-to-let mortgages may reflect equity withdrawal by (previously outright) owners of second properties rather than an increase in the stock of buy-to-let properties.

http://www.nationwide.co.uk/hpi/historical/MPR0410.pdf
>>

Looks like the smart money, i.e. "large corporate" investors, are getting out of the market, just as amateur BTLs are moving in?

greedwatchuk

Houseprices Expensive??? Dont believe the hype!!They are still not that expensive in relative terms in all parts of the country.For example I have a very big two bed flat in the centre of Cardiff worth 650pcm if I let it out.I have it on the market for 110k. It would cost roughly about 500pcm on a good interest only mortgage deal and a 5% deposit.Thats 250 each for a couple buying together.If they wanted to pay even less they could have a lodger at 250 a month (tax free now) which then leaves only 125 each,thats approx 32 quid a week!Not bad for a home of your own which is also a fabulous long term investment in a city with a top class University.So lets see rent or buy?650 a month and get nothing back for it or buy it,its a no brainer to me.Thanks to the sections of the press however and the doom and gloom mongers who seem to want to see a crash I cannot sell it.Yes house prices are expensive in lots of parts of the country but not everywhere.I think its probably best for everyone if there is a correction rather than a crash which is probably more likely.What lots of people seem to forget is that if there is a crash it will probably effect the economy overall which could mean increased unemployment etc.That way nobody benefits!