How interest rates affect property values

cells

mwpt wrote: »

Absolutely agree. That is why, with the trend to concentrate productivity in cities, we see prices in all major capital cities around the world growing, and growing fast. Demand is the biggest driver.

A component of demand is the ability to pay with credit. A simple test to see if credit contributes to prices is to ask and answer honestly, if you are a home owner who has bought in the last 7 years since the crash, would you buy your current house at the current market price at a mortgage rate of 7% on a regular 25 year term.

If people are being honest, my guess is no in most cases. My repayments would be 38% above the rent price for the property in that scenario. However, with my current repayments on a 30 year term at 2.4% rates, they are 24% below rent. It completely makes sense for me to buy the property at these rates, but no way would I pay the current price at 7% rates on a 25 year term.

All good and well but rates don't move to change the price of London property. rates of return tends to be more strongly linked with what the economy is doing.

So using your type of example, how much would you be prepared to pay for property if rates halved but you also lost your job and only managed to find another paying half as much? How much would you be prepared to pay for property if rates doubled but your wages increased 50% recently and looks to increase 50% again in 5 years.

cells

ukcarper wrote: »

I asked you before how much of the recent rise do you think is down to low rates I've said it can have a small effect but can't explain the big jump we have had recently.

Especially since the UK is multiple markets.
If rates played such a big part in driving prices higher than why are prices the same in nominal terms as a decade ago in the north the Midlands?

wotsthat

mwpt wrote: »

Oh, your argument is now a fact is it?

I'll just stop debating then because if you say it's a fact, well what can I do.

The fact remains, lower interest rates increase ability to pay for housing increasing effective demand. In any other scenario you would accept more demand = greater prices, but you have a blind spot when it comes to housing.

I do accept your scenario to a degree but the fact is, yes a fact, that its application in the real world is capped by earnings ratios, loan to value limits and deposit requirements.

Because of this and, IMO, interest rates being a junior factor in setting house prices is why you can't show a consistent link over time and between regions of house price to mortgage rate - the correlation is noise compared to other factors.

Your place on the river. What is the interest rate scenario that allows you to buy it? I know you're being sarcastic about your human rights but if your scenario came about do you really think anyone would lend you their money to buy it?

Conrad

BUY TO LET AND REDUCING INTEREST RATES AS EQUITY BUILDS;


Something I wanted to post, so I've chosen this thread rather than start a new one.


Today I switched two of my B2Ls to new deals within the same existing lender.


Due to building up equity in them over last 24 months, we now qualify for lower rates, taking both mortgage payments down by a third.


Why do I tell you this?

Well, the reason I mention this is because it's another example of how those theoretical spread sheets many crashy / bear types like to indulge us with, are built on inaccurate assumptions, not for example taking into account things like reducing mortgage rates being applied as one builds more equity.


Take home message > be wary of bears baring spread sheets.

mwpt

Conrad wrote: »

BUY TO LET AND REDUCING INTEREST RATES AS EQUITY BUILDS;


Something I wanted to post, so I've chosen this thread rather than start a new one.


Today I switched two of my B2Ls to new deals within the same existing lender.


Due to building up equity in them over last 24 months, we now qualify for lower rates, taking both mortgage payments down by a third.


Why do I tell you this?

Well, the reason I mention this is because it's another example of how those theoretical spread sheets many crashy / bear types like to indulge us with, are built on inaccurate assumptions, not for example taking into account things like reducing mortgage rates being applied as one builds more equity.


Take home message > be wary of bears baring spread sheets.

I honestly don't know what to make of this. Your business strategy has gone well, due to most things falling into place. Poor growth issues in the world have pushed central banks to try to stimulate things with lower rates which has meant the biggest cost for your business has gone down. At the same time, it pushes up the asset prices, which is double good for you as you can either go to lower rates or extract equity and buy more houses.

But you choose to post from the view that your savvy investing skills must have known that the world economy was going to suffer, central banks would react with lower rates and you outsmarted all of them because you're such a savvy business person.

You don't acknowledge the role of luck, which had it gone the other way means you would have been crushed, left with no business at all and perhaps even a claim on your own main home.

But well done for piling in with no real understanding of the downside risk and coming to gloat that your gamble paid off.

economic

mwpt wrote: »

I honestly don't know what to make of this. Your business strategy has gone well, due to most things falling into place. Poor growth issues in the world have pushed central banks to try to stimulate things with lower rates which has meant the biggest cost for your business has gone down. At the same time, it pushes up the asset prices, which is double good for you as you can either go to lower rates or extract equity and buy more houses.

But you choose to post from the view that your savvy investing skills must have known that the world economy was going to suffer, central banks would react with lower rates and you outsmarted all of them because you're such a savvy business person.

You don't acknowledge the role of luck, which had it gone the other way means you would have been crushed, left with no business at all and perhaps even a claim on your own main home.

But well done for piling in with no real understanding of the downside risk and coming to gloat that your gamble paid off.

exactly right. lot of people think they are just smart by having done so well, but I call it pure luck.

nothing ever goes up in a straight line. there are cycles. property has had a good run. no one knows when it will end but the time will come eventually. my view is its topped in London in real terms. there are better investments out there. those who bought recently for investment will be badly hurt.

cells

mwpt wrote: »

I honestly don't know what to make of this. Your business strategy has gone well, due to most things falling into place. Poor growth issues in the world have pushed central banks to try to stimulate things with lower rates which has meant the biggest cost for your business has gone down. At the same time, it pushes up the asset prices, which is double good for you as you can either go to lower rates or extract equity and buy more houses.

But you choose to post from the view that your savvy investing skills must have known that the world economy was going to suffer, central banks would react with lower rates and you outsmarted all of them because you're such a savvy business person.

You don't acknowledge the role of luck, which had it gone the other way means you would have been crushed, left with no business at all and perhaps even a claim on your own main home.

But well done for piling in with no real understanding of the downside risk and coming to gloat that your gamble paid off.

it was clear to all (by which I mean me ) that interest rates were on a downwards trend for the best part of 20 years before the crash and would continue to go down towards zero. I have posted my views and arguments on this before so no need to go into details here. Of course you can choose to incorrectly believe it is all down to market manipulation by central banks if you want to.

In such an environment of fundamentally falling rates long term bonds do well and the longer the term the better. property in this respect acts almost like perpetual bonds.

Now I still do not think there was a lot of skill in deducing the above but fund managers are paid handsomely to increase their customers wealth and the city completely missed (mostly) the opportunity to invest in these perpetual bonds aka property. Now some asset managers did very well moving into long term bonds (my own pension fund this this, I dont see that as any more or less luck/skill than Conrads investing) but didn't have the risk/desire to move into 'perpetual bonds'



PS: There was some 'skill' is seeing that London would outperform the rest of the UK and inner London moreso than outer London. This was clear in GDP/GVA data and the tend is likely to continue. Its the basis of pretty much all forecasts even the Gov/ONS has London growth surpassing rUK for the foreseeable so a London investment was the smart choice. However that may now be priced in so may not hold true in the medium term at these prices.

cells

economic wrote: »

exactly right. lot of people think they are just smart by having done so well, but I call it pure luck.

Everything in life in luck/good-fortune which is why we have significant 28-45% 'luck' tax

Having said that a lot of property investors also do some degree of development. Everything from the low end refurbish to loft extensions to extending and converting which adds value

There are also investments with future changes in mind. For instance one of my property purchases will bag me quite a significant profit if self drive cars come to being. Im not sure I would call that skill but its good foresight or at least I think so.

economic wrote: »

nothing ever goes up in a straight line. there are cycles. property has had a good run. no one knows when it will end but the time will come eventually.

sure but the good thing about property is that its liquid-ish nature means price movements up or down are more limited. Share prices can fall down to zero or double in a year property doesn't work like that its more smooth.

Also in property estate agents act almost like market makers do for low volume shares. Only the estate agents generally are not as smart.

So if property was a share in 2012 the market makers might have just doubled the price of the shares seeing that there is robust demand at twice the price. This would have multiple advantages. However estate agents are not that way inclined or have the power so what they did was move prices about 20% a year for 4 years rather than do what would have been more logical which would have been to double prices in 2012.

This was reasonably clear to me in 2012 (London property was cheap in 2012 and I thought we would see them double) so I 'doubled down' with the idea that the market makers would do over 5 years what market makers in shares would do over 5 weeks.

my view is its topped in London in real terms.

I think we are at about fair value today. But that does not mean prices cant get expensive (eg +50% in real terms)

there are better investments out there. those who bought recently for investment will be badly hurt.

What better investments? its easy to say 'better investments' but pray tell

Those who bought might be modestly hurt especially if they purchased in a low growth area of the country.

economic

hmmm how do you define value in property? you must have some sort of method to come up with the statement the current prices are fair value.

the prices are the prices and whilst I agree prices can go up (wages really are irrelevant to house prices, but instead inequality is relevant), they can also go down and I am not 100% what will happen. what I do know is there are a lot of changes happening, the market is cyclical (as with anything) and maybe we have reached the top who knows. what if the economy starts to decline, unemployment rises and people start to get very nervous? sentiment can change and will change overnight.

the 50% real price rise - I don't think this could happen as politics will come into play well before it reaches 50% higher then current prices.

It is a tough one and it must be a hard decision for FTB who can afford (just about) and deciding whether to buy now or wait for a correction of some sort.

economic

as for investments - I would go for global trackers vs London property rental anyday at current prices.

if you are talking property development to add significant value then that's a different story.