How interest rates affect property values

HAMISH_MCTAVISH

mwpt wrote: »

Thanks. So 2016 to 2006. It appears that in 2006, mortgage affordability was just over 40% and today it is just under 40%, a difference of a few percentage points. While prices are more than double. Low interest rates allow this situation to exist.

Or alternatively it's gone from 55% in 2007 to 38% now in London.

And from 48% in 2007 to 28% now nationally.

It's clearly not the major factor and simply does not support your assertion that there has not been a significant decrease in mortgage payments as a % of income (since 2007 they've fallen massively, both in London and nationally) and that instead people kept mortgage payments the same and borrowed more. (they didn't)

wotsthat

mwpt wrote: »

Well, you're excluding credit from the cost of housing. That is what I meant. But please feel free to ignore that line and comment on the rest of my post.

That's a strawman too.

I think I've been very clear that I think credit availability is a factor affecting price but I'm unconvinced a lower cost of credit will lead to a lender increasing the size of a mortgage. It's obvious to be honest because there's a cap on mortgage size which kicks in at X x earnings.

My mortgage has varied between 8.95% and 2.29%. The maximum amount I can borrow was/ is the same and it's the same* factor of earnings.

There just isn't enough supply of houses (or too much demand) in London so reducing credit to make prices lower but no more affordable seems a pointless exercise in enriching the already well off. I'd concentrate on increasing supply which IMO is a far bigger factor and would create greater rather than less wealth equality.

*Maybe the factor has changed over the years, I don't really know, but, if so, probably not by much.

wotsthat

mwpt wrote: »

Thanks. So 2016 to 2006. It appears that in 2006, mortgage affordability was just over 40% and today it is just under 40%, a difference of a few percentage points. While prices are more than double. Low interest rates allow this situation to exist.

London population has increased by over a million people during that time too.

mwpt

HAMISH_MCTAVISH wrote: »

Or alternatively it's gone from 55% in 2007 to 38% now in London.

And from 48% in 2007 to 28% now nationally.

It's clearly not the major factor and simply does not support your assertion that there has not been a significant decrease in mortgage payments as a % of income (since 2007 they've fallen massively, both in London and nationally) and that instead people kept mortgage payments the same and borrowed more. (they didn't)

The graph I posted shows that lending multiples have increased.

cells

mwpt let me help you improve pet theory 1.0


Huge sums of capital in asset classes.

Bonds and savings rates went down (they react more quickly)

The 5-10% yields on property looked attractive so cash buyers started moving capita from bonds gilts stock market and cash savings accounts to proeprty.

They were willing and are willing to do that until the spread of yields between property and savings accounts fall.

If interest rates go up to 5% then the flow of savings to property would slow or stop as why bother getting 4% on property if the bank will give you 5%

The yield calculations must also take into account rents. Rents have not moved the same everywhere. London rents have increased more than rUK which explains partly why London prices have gone up faster.
Some northern and midlands regions rents have gone up less than the national average (excluding London) which partly explains why prices have gone up less there.

Also you could make an argument that the residents and businesses of London have more savings in banks bonds and shares than rUK and that because most people only invest locally or close by London may have responded faster the the fall in rates than rUK.

You can also make the argument that London property acts more like bonds than rUK as the overheads are lower. Managing and running 500 property up norf is a lot more costly than 50 properties in London.


All of this makes sense but we have only looked at the price side and not the rent side. Why have rents in London increased more than rUK and what proportion of rent movements explain price increases and what proportion of falling rents explain price increases.

London is up about 85% in price.
For me I feel that some 50-60% of London price increases are due to higher rents (strong economy with many more residents). The rest you can argue are due to lower rates and a better housing stock (lots of money is spent on refurbing in London in some cases £100k is spent on the inside of fairly normal homes. That pushes up prices but you end up with a better product. That sort of investment does not really happen outside of London).

ukcarper

mwpt wrote: »

You believe house prices are some intrinsic fundamental value, unrelated to supply and cost of credit. Therefore from that fact, your position makes sense, people won't borrow more. But if this was true, we should have seen a very notable reduction in mortgage payments as a percentage of income. From what I know, this is just not the case.

On the other hand, I believe that cost and supply of credit isn't just correlated with cost of housing, it is a cause of high cost (*) because it makes up a big part of effective demand. People are bidding in a market, prices aren't just set at X and that's that. People bid prices up. We have 20 buyers per day looking at houses in London, so of course they're going to bid up. But they can only bid up to what they can afford and if they can afford more because credit is cheaper, they will bid higher.

You state that people can't bid more than lending restrictions but this implies that we always operate at the limit of lending restrictions over the years. This isn't true, as ukcarper says (I'd need to see his source), median multiples are still below 4.5. And even 4.5 isn't a hard limit, banks can still lending over this to 15% of their mortgages.

And according to cml, the percentage of people going over this has been increasing:
https://www.cml.org.uk/news/news-and-views/affordability-bites/



Also note the quote:



All of this agrees very well with the theory that monthly mortgage payments are roughly linear, and track rents, but borrowing multiples increase as cost of credit comes down, so prices move higher.

Also note that I expect if MMR stays in place, we will reach a soft ceiling within a few years where people are more and more constrained by lending multiples and so I don't expect such high HPI to continue for more than a few years, unless other economic conditions change (big wage growth for one).

(*) When demand > supply. If people don't want to buy, throwing more credit at them won't push up prices.

I posted link showing median level and according to your graph the percentage of FTB exceeding 4.5X is lower than it was 2 years ago yet prices have increased .
http://www.nationwide.co.uk/~/media/MainSite/documents/about/house-price-index/2016/Jan_2016.pdf
Between 2010 and 2013 prices did not increase but increased by 30% between 2013 and 2015 how does that look in relation to your graph, looks to me that prices remained static while percentage of people exceeding 4.5x rose and increased when number fell.

michaels

Can we amend the theory and suggest that low interest rates with fixed mortgage multiples are likey to impact on the balance of oo vs btl buyers?

AnotherJoe

mwpt wrote: »

No, you've picked a short period to suit your view. Houses can increase or decrease during rate movement periods based on wider economic conditions. But ultimately, increasing the supply (of credit) and decreasing the cost (of credit) will move house prices upward in areas of demand > supply.

So?

That doesn't tell you how much, on what time scale, nor can it because there are numerous other factors. Why are you fixated on one of many many factors ? You might as well argue that the amount of money a football team has to spend, is the only factor in determining a teams position in the league table.

And then you've got Leicester City and Chelsea.

When you can tell me, what a (say) 1% rise in interest rates now will do to house prices in 1 years time, then I'll be impressed. And I'd be even more impressed if you were right. I look forward to some numbers from you.

If you can't do that, then I stand by my position, a big fat "so what?"

Dandytf

wotsthat wrote: »

All that effort to argue a straw man...:o

Thanks for the chart.

I'm in the above 4% of movers 2009.

Here is me 20012 patiently hoping to avoid interest rate rise before mid 20017 when my 5 yr 5% fixed rate finishes.😅

economic

reading through this thread just makes me laugh. there is no magic formula that determines what house prices should be based on level of interest rates, multiples borrowed etc etc. its stupid if you think like this.

people look at median incomes rather then mean incomes to determine earning multiples relative to house prices. even median incomes is a wrong way to look at why prices are rising (or why they are in a bubble).

the key is that property sells at the margin - i.e. you only need enough people who can afford to buy to drive up demand. so this means median wages are completely irrelevant as are mean wages.

interest rates being low may help but its certainly not the only factor. it may surprise you but there are enough people out there that have large deposits to be able to afford to buy driving up prices along with people who can borrow more too. low rates do help but its certainly not the only factor driving up prices.

in London there are a lot of couples who have professional jobs that have saved up over the years who can put on large deposits not to mention parents gifting cash to help to.

that's not to say prices cant correct if demands falls away.