How interest rates affect property values

mwpt

An interesting perspective on mortgage rates vs LTI vs monthly repayments. Trend is as mortgage rates drop, LTI increases.

https://twitter.com/resi_analyst/status/699955296068837377

Generali

mwpt wrote: »

An interesting perspective on mortgage rates vs LTI vs monthly repayments. Trend is as mortgage rates drop, LTI increases.

https://twitter.com/resi_analyst/status/699955296068837377

I guess the problems show themselves if/when interest rates rise. How can we move back up the curve without mass bankruptcies?

cells

mwpt wrote: »

An interesting perspective on mortgage rates vs LTI vs monthly repayments. Trend is as mortgage rates drop, LTI increases.

https://twitter.com/resi_analyst/status/699955296068837377

like with so many things you make the mistake of taking two variables and plotting a graph and coming to a silly conclusion because you ignore the many other variables that may be impacting upon your graph

One factor is that the stock of homes today is different from 25 years ago. How many extensions, loft conversions, expensive kitchens, new modern heating system, new garages, improved insulation, added solar panels, etc etc now extist that did not 25 years ago. Possibly many millions of units have been improved so with interest rates and wages the same house prices should go up as houses have had sometimes very substantial capital sunk into them. Generally I think there is more of this in London which also skews London more than rEngland upwards. Also bear in mind new builds of which there has been about 4 million in 25 years are also at higher regulations higher complexity and higher cost and they also might be pushing the 'average' higher


That is just one additional variable there are others too. For instance the stock of wealth has grown. That is to say in real terms people are getting bigger gifts and inheritances which allows people to pay higher multiples of incomes without an actual higher income burden. Many other variables too



Having said all that, even you graph shows an average of about 22% of income on housing while the last data point shows less than 20% is currently spent so more uproom and guess what that is what happened from your last data point in 2010 to now

cells

Generali wrote: »

I guess the problems show themselves if/when interest rates rise. How can we move back up the curve without mass bankruptcies?

Always remember that the UK (and this probably applies to all countries) is not one housing market but at least 10 regional markets and more likely something like 10 different markets in each region to give you about 100 distinct different markets.

But lets stick to regions as we can not discuss 100 markets in a small thread. Only London is currently expensive the other regions vary from down right cheap to affordable.

Take the north east and north West. £65k-£70k for the average terrace. With a 20% down mortgage with 5% interest (about double today). That is a burden of just £2.8k a year in interest or £376 per month on a REPAYMENT mortgage. Now you will always find silly people argue that price X is unaffordable for someone but £376 per month is less than you would pay for a council flat so it is without a doubt affordable very very affordable down right cheap. So for two regions home to 10 million people even if mortgages went to 5% they are at current prices very cheap and very affordable.

The same is true for the West&East Midlands home to another 10 million people. Even with mortgages at 5% a repayment mortgage on the average terrace is just over £500pm again very affordable very cheap and close to renting a social house

mwpt

cells wrote: »

like with so many things you make the mistake of taking two variables and plotting a graph and coming to a silly conclusion because you ignore the many other variables that may be impacting upon your graph

It isn't my graph. It is just another person who agrees with orthodox economics that if you increase purchasing power in the form of easier or lower cost credit, the asset price increases.

You are the contrarian here, not me. It is you (and your small MSE gang) who believe they know something most standard economists don't. I also know from other posts of yours that you don't even really believe your own argument on this thread.

cells wrote: »

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.

Here you are talking about the fact that you guys didn't get lucky by investing in property because you knew interest rates were falling. We both know what you're saying here and we both know you actually understand that cost of credit determines the biggest cost of running your business and as it falls, so you can bid higher for the properties.

I won't bother with the rest of your argument because it is chaff. All that actually matters is you secretly agree that falling interest rates translate into high house prices, but don't want to say it openly for some reason.

Conrad

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.

I'm the first to admit, luck is critical, and like you I detest property price gloating as it's pretty much down to serendipity. I especially dislike disguised smug equity braggers - "oh it's never right, I just found out my property is worth £xxx, I mean, it cant be right can it"...(translates broadly to 'aren't I clever and look at my baubles)


As to me thinking I could time the markets, well my whole outlook was informed by a big mistake I made on this front. I sold my B2L's in 06/07 - oh how clever was I, not. I missed out big time on rapidly falling rates which would have given me several years of very welcome additional income. The transactional and agro costs of exiting and then later re-entering the market added to my woes.


I even fuked about with property abroad, in Germany and elsewhere, big waste of time.


About 3 years ago I was pretty certain prices were cheap enough to get back into UK B2L, and actually I had a real impending sense of urgency, and if fact it took me longer than I hoped to get back in and as such I did not buy in at the opportune time in each case.


I am nothing compared to many of you when it comes to intelligence and depth of understanding, but on the other hand I think you can over think things like property investing.


My outlook was pretty simplistic - prices had fallen, rents were high, tons of people were moving to the UK, and above all the UK was a gem of relative safety in a world of distrust.


THE OUTLOOK

My honest advice to anyone bearish is to just think in a sort of 30 year time span.
Prices roughly double every 14 years or so. Don't be obsessed about trying to time the market. Buy now and you can be very confident in 30 years time that property will be worth vastly more than it is now. Property is about the most basic need after food, regardless of all the bar charts you might ever come across, nothing will alter this


PS - my 'bragging' is actually an attempt to motivate others to overcomes fears and get stuck in. My default mentality is to be fearful so I like to show others that keen with this mindset you can overcome. Fear is almost always misplaced in hindsight.

Conrad

economic wrote: »

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.

1) If the market tanks - their JUDGEMENT was poor


2) If they do well from the market - their JUDGEMENT was irrelevant, it was PURE luck




Is that a fair summary of your position?

Crashy_Time

cells wrote: »

like with so many things you make the mistake of taking two variables and plotting a graph and coming to a silly conclusion because you ignore the many other variables that may be impacting upon your graph

One factor is that the stock of homes today is different from 25 years ago. How many extensions, loft conversions, expensive kitchens, new modern heating system, new garages, improved insulation, added solar panels, etc etc now extist that did not 25 years ago. Possibly many millions of units have been improved so with interest rates and wages the same house prices should go up as houses have had sometimes very substantial capital sunk into them. Generally I think there is more of this in London which also skews London more than rEngland upwards. Also bear in mind new builds of which there has been about 4 million in 25 years are also at higher regulations higher complexity and higher cost and they also might be pushing the 'average' higher


That is just one additional variable there are others too. For instance the stock of wealth has grown. That is to say in real terms people are getting bigger gifts and inheritances which allows people to pay higher multiples of incomes without an actual higher income burden. Many other variables too



Having said all that, even you graph shows an average of about 22% of income on housing while the last data point shows less than 20% is currently spent so more uproom and guess what that is what happened from your last data point in 2010 to now

In a proper correction having a loft extension won`t save you...
:rotfl: The property will still just be massively overpriced. Any "inheritance" based on property will be crashing too so it will self perpetuate the downward spiral. It was a credit based Ponzi scheme, nothing more nothing less, people watched the telly and believed all the junk about adding bits on to their houses.

cells

mwpt wrote: »

All that actually matters is you secretly agree that falling interest rates translate into high house prices, but don't want to say it openly for some reason.

North East Now: £97.6k
North East 10 years ago: £118.5k

Why are prices some 20% lower in NOMINAL terms v a decade ago in the north east? Did the base rate not fall from 5% to 0.5% there. Did the residents in the north east not get your memo to bid up prices as rates are lower?


Let me help you out. The north east house prices faired the worst as its population increase was the lowest of all the regions. That variable overpowered the low interest rates variable.

cells

Crashy_Time wrote: »

In a proper correction having a loft extension won`t save you...
:rotfl: The property will still just be massively overpriced. Any "inheritance" based on property will be crashing too so it will self perpetuate the downward spiral. It was a credit based Ponzi scheme, nothing more nothing less, people watched the telly and believed all the junk about adding bits on to their houses.

no my dear boy this is a rich country with a lot of wealth and a value added of nearly £2 trillion pounds a year and a stock of wealth in the region of £15 trillion pounds of which ~2/3rd is not residential property.

With the exception of London (and then mostly inner London rather than outer London) most the regions are down right cheap. The North and Midlands and Wales and Scotland home to about half the country are mostly cheap so cheap that the inerest on the mortgage (even at 5%) is less than local social rents.

Of course we all know that for you property needs to be 100% off to be worth the risk