London increased by 12.4% in 2015

mwpt

HENRY78 wrote: »

Its all bonkers and surely cannot continue.

I also [strike]do[/strike]did not understand how people are paying the prices they are, given what the stats tell us of the earnings percentiles. But it is a fact that people are paying these prices, so bonkers or not, that is the market.

I think a lot of people will be up-steppers who have seen the value of their property surge and their mortgage payment plummet as interest rates went down. So these people either sell their existing place for a huge profit or remortgage keeping it as a BTL and using the difference to trade up. There will be a lot of couples earning decent salaries around London and in this position.

Picture a couple who bought a two bedroom flat for £240k in Wimbledon in 2005. This flat probably sells for upward of £500k now (let's call it £500k) and they'll have paid down a chunk of that mortgage. Perhaps their outstanding mortgage is pessimistically £150k and during that time they've also continued to save say £5k each per year. They have £350k from equity in the house, £100k in savings and salaries of say £50k each (not huge for London).

They can borrow £450k I believe (?) and have £450k in equity for mortgage and fees. This enables them to buy a house of around £850k.

I don't think that scenario is at all a stretch, I'd say it might be fairly common. All it takes is enough of these people to be around and transacting to set the prices. Remember, only a small percentage of stock changes hands each year.

But where to from here? Mortgage interest rates surely can't fall that much further? So people are definitely constrained by what they can afford to pay per month and that in my opinion limits the upside we can see through cheap credit much further. The drop from > 10% to the typical 2.5% mortgage now was a once in a generation event.

But how many of these buyers are there around? I'd say still a lot, so as long as credit remains cheap, prices will not be dropping significantly.

westernpromise

HENRY78 wrote: »

But surely it comes down to affordability. If only a small percentage of people can afford a bog standard 3 bed semi within commuter distance of London then surely it cant continue.

Affordability seems to be an opaque thing though. When it comes down to tacks and when the alternative is to rent, people seem to keep on ponying up to buy, far beyond the point when you'd think they'd run out of money.

In 1988 I was on about £24k and paid £80k for a flat with a £72k mortgage. I was then trapped by negative equity for 10 years. Today the same salary would be about £46k and the same flat about £320k, so although the flat's price has quadrupled and the salary has only doubled, interest rates are a quarter or a fifth of the 1988 level. So on that basis, knowing all this, I'd be very happy to pay up for that flat today. It is is more affordable now than it was when I owned it. It still has a way to go to become less so, because with interest rates this low, the negative equity risk largely goes away. So although it looks very pricey, it's not and there's room for it to go up further.

It is sometimes said that house price inflation has been against a background of generally high inflation, which somehow explains it. In fact though inflation is generally bad for house prices - we had high inflation in the 70s and houses lagged, the same happened in the early 1980s and of course it happened again in the early 90s. Conversely we saw huge price inflation in houses at times there wasn't any in prices generally (1950s, 1960s, mid 1990s to present).

It takes a brave man to bet against a 65-year trend and I am not such a man.

westernpromise

Another thought is that if transaction volumes drop too far mortgage lenders may cut rates to generate business. So we could see a return to the days of lower rates for new mortgages than for remortgages. This would allow rates to fall further.

Samsonite1

HENRY78 wrote: »

But surely it comes down to affordability. If only a small percentage of people can afford a bog standard 3 bed semi within commuter distance of London then surely it cant continue.

Here comes the rub - a lot of people in these areas CAN afford a bog standard 3 bed semi and more. I think once you realise this, it is easier to understand the prices. The fact is that a lot of people in and around London earn a lot of money.

I myself was living and working in the South East. I got a job in London and doubled my salary, meanwhile I had a nasty 2 hour commute for while. I found a London borough with fast transport links to Central London and found that mortgage repayments on a property were about £1000 less per month than rent in the same properties. So we bought and now with even lower interest rates, a 5 year fixed mortgage is even cheaper compared to renting.

So buying was certainly a way to save a lot of income for us and still is.

I have only lived in Greater London for a few years, but 30-something couples and young families have been buying up properties left, right and centre and continue to do so - prices of £500k-£800k being the general range in the areas near me for young families - first time buyers tending to be at the lower end of this and second time buyers at the higher end.

Maybe it is just me, but one thing that seems to be happening is that there are cheaper neighbourhoods and obviously less well-off people have no choice but to live there, while the other places rise in price. This sort of self-segregation troubles me, but I guess more cheaper housing will not help this issue, unless the cheaper housing can be placed in the more expensive areas. One problem at a time I guess?!

Graham_Devon

westernpromise wrote: »

In 1988 I was on about £24k and paid £80k for a flat with a £72k mortgage. I was then trapped by negative equity for 10 years. Today the same salary would be about £46k and the same flat about £320k, so although the flat's price has quadrupled and the salary has only doubled, interest rates are a quarter or a fifth of the 1988 level. So on that basis, knowing all this, I'd be very happy to pay up for that flat today. It is is more affordable now than it was when I owned it. It still has a way to go to become less so, because with interest rates this low, the negative equity risk largely goes away. So although it looks very pricey, it's not and there's room for it to go up further.

You wouldn't get the loan today.

Lenders will assess whether you can pay that loan back at 7% rates. So theres no point in suggesting rates are low, you'd do it.

At 7% you'd be broke.

You appear to be making the mistake of assuming rates will never change.

westernpromise

Graham_Devon wrote: »

You wouldn't get the loan today.

Lenders will assess whether you can pay that loan back at 7% rates. So theres no point in suggesting rates are low, you'd do it.

At 7% you'd be broke.

You appear to be making the mistake of assuming rates will never change.

Oh, I think I'd get the mortgage. Someone would do it. I was offered 6x salary when I bought my current house in 2012. When I remortgaged last year the same was on offer. Lenders are allowed to do this but only for a certain percentage of their loan book. I would be in that percentage, as indeed are the people who buy those kind of places now, because then and now the mortgagor's salary is likely to rise rapidly. Fix for 5 years, pay off a big slug of it and Robert's your father's brother.

You appear to be making the mistake of thinking high mortgage rates are normal, Graham. In fact rates today are close to the 300-year norm; it's the 10% rates before those that were the aberration. There have only been 20 years in the last 320-odd when base rates have been above 10% and all 20 were between 1970 and 1995.

As Peter Mandelson said, only when you get sick of hearing yourself say it might the message be getting through.

Another point to note is that house prices tend to go up when inflation is low and down when it's high. So from 1950 to 1970 house prices did well, as they did in the later 80s and have done since 1995. All were eras of low inflation. They went down when inflation went up. So someone who took on a mortgage over a five year period could be pretty confident today that either by repaying the mortgage or the property appreciating they'll be in a good place to redeem it in 5 years.

Graham_Devon

westernpromise wrote: »

Oh, I think I'd get the mortgage. Someone would do it. I was offered 6x salary when I bought my current house in 2012. When I remortgaged last year the same was on offer. Lenders are allowed to do this but only for a certain percentage of their loan book. I would be in that percentage, as indeed are the people who buy those kind of places now, because then and now the mortgagor's salary is likely to rise rapidly. Fix for 5 years, pay off a big slug of it and Robert's your father's brother.

I hope you flicked your hair back and claimed "i'm worth it" while writing that!

Suddenly everything is plain sailing and blindingly simple again. What I would do to live in such a world where its jam today, tomorrow and everyday.

padington

Graham_Devon wrote: »

I hope you flicked your hair back and claimed "i'm worth it" while writing that

... Or you could deal with the key argument about average interest rates and play the ball instead.

Graham_Devon

padington wrote: »

... Or you could deal with the key argument about average interest rates and play the ball instead.

I did - first.

And got the ridiculous response westernpromise wrote.

wotsthat

Graham_Devon wrote: »

You wouldn't get the loan today.

Lenders will assess whether you can pay that loan back at 7% rates. So theres no point in suggesting rates are low, you'd do it.

I feel sorry for people forced to rent because of sensible mortgage lending/ mortgage rationing. It must be galling to be declined for a mortgage based on an arbitrary rate which seems unlikely to be seen any time soon.

I don't know why young potential homeowners were targeted in this way. It's mental because they can fix for a long period at low rates and guarantee they'll never see 7% for years if ever.