How interest rates affect property values

ukcarper

mwpt wrote: »

Incorrect. Low rates can mean your monthly payment is less per month even while house prices continue to go up. You could work out an example to check this.

I'll even mention the more direct case of BTL. If BTL uses leverage to buy property and mortgage rates for BTL were at 8% instead of 3% (or whatever they are), they probably could not run a solvent business at the current house prices. Adjust figures as needed, I'm just guessing to make the point.

I can see that BTL might have some effect as the loan is based on rent you can get compared to mortgage payment, but the effect is limited by the what the rental market will bare and what profit landlords want.

wotsthat

mwpt wrote: »

Incorrect. Low rates can mean your monthly payment is less per month even while house prices continue to go up. You could work out an example to check this.

I actually think your formula fell at this first hurdle.

It's a huge assumption to suggest people take the amount they can afford to repay each month and calculate, using the current interest rate and repayment term the maximum they could borrow.

If you ask 100 of the most committed debt junkies what the maximum they can borrow is and not a single one will use your formula because there's a simpler answer - it's whatever a lender will lend them. That amount is function of earnings and not the prevailing interest rate.

mwpt wrote: »

I'll even mention the more direct case of BTL. If BTL uses leverage to buy property and mortgage rates for BTL were at 8% instead of 3% (or whatever they are), they probably could not run a solvent business at the current house prices. Adjust figures as needed, I'm just guessing to make the point.

Interest rates on debt determine costs which impacts profitability which will influence decisions to invest. It's tenuous to argue interest rates set house prices because, by that logic, they set the price of everything although plenty of stuff is getting cheaper...

In the grim Midlands my house is still worth less than when I was paying 5.48% vs 2.29% today. It's not to say interest rates aren't a factor in setting prices but clearly there are other, more senior, factors at play.

BTW - did you know your best friend was going to be on the radio? I might have a listen to see if he comes over better using the spoken rather than written word.
http://www.housepricecrash.co.uk/forum/index.php?/topic/208686-bland-unsight-on-the-radio/

mwpt

wotsthat wrote: »

I actually think your formula fell at this first hurdle.

It's a huge assumption to suggest people take the amount they can afford to repay each month and calculate, using the current interest rate and repayment term the maximum they could borrow.

I could equally argue that it is an assumption that this isn't what happens, if you accept that month mortgages very roughly track monthly rents. I think Hamish's graph shows that mortgage affordability hasn't fallen out of the historical norm band, whereas prices have risen a lot. Seems fairly reasonably to assume the lower mortgage rates are allowing this to happen. I believe the average is still some way below the max lending multiples, so we've got upward room yet.

I feel like I'm the crackpot here, but I haven't invented anything, I'm just agreeing with what (I believe) is pretty standard economics.

BTW - did you know your best friend was going to be on the radio? I might have a listen to see if he comes over better using the spoken rather than written word.
http://www.housepricecrash.co.uk/forum/index.php?/topic/208686-bland-unsight-on-the-radio/

Ha ha. Have you read his book? I have not but I do credit him with knowing his stuff, well researched, articulate. But at the same time I think he may have (in rugby terms) tunnel vision.

ukcarper

From this link https://www.cml.org.uk/news/press-releases/4160/

Table 2: First-time buyers, lending and affordability

average income multiple FTB Jan 2014 3.42, Jan 2015 3.38

mwpt

ukcarper wrote: »

From this link https://www.cml.org.uk/news/press-releases/4160/

Table 2: First-time buyers, lending and affordability

average income multiple FTB Jan 2014 3.42, Jan 2015 3.38

I think the graph I showed previously agrees with this yearly drop, but also shows an upward trend over multiple years.

We could approach this in another manner. If we examine London, could you describe the mechanism, backed with some simple calculations that allows house prices to increase vs average earnings YoY but retains monthly mortgage payments in line with historical norms? On this thread I'm advocating that it is lower interest rates that allow this to happen, but could you describe another mechanism?

wotsthat

mwpt wrote: »

Ha ha. Have you read his book? I have not but I do credit him with knowing his stuff, well researched, articulate. But at the same time I think he may have (in rugby terms) tunnel vision.

His problem is he STR'ed in 2011/12 in the SE AIUI. I'm a dunce who thought buying would be cheaper and better over the long term and it has but he's an awesome, articulate wise owl and got it wrong.

I think the fact he couldn't outsmart the sheeple (by poor judgement or bad luck) makes him angry and a little mean spirited at times. He's a teacher and I know exactly the type.

Not looked for his book. I'd prefer the insight of someone who profited from the GFC rather than someone who didn't but now thought he knew why.

mwpt

wotsthat wrote: »

His problem is he STR'ed in 2011/12 in the SE AIUI. I'm a dunce who thought buying would be cheaper and better over the long term and it has but he's an awesome, articulate wise owl and got it wrong.

I think the fact he couldn't outsmart the sheeple (by poor judgement or bad luck) makes him angry and a little mean spirited at times. He's a teacher and I know exactly the type.

Not looked for his book. I'd prefer the insight of someone who profited from the GFC rather than someone who didn't but now thought he knew why.

Well, on the other hand, I think if you read enough about economics and trading, you'd revisit that opinion. There are reasons for being wrong and reasons for being right, but pure outcome of results is often not the best way to judge those reasons. You recently disagreed with my investment strategy of buying into dips rather than drip feeding. My strategy has worked better than drip feeding would have, but you still think my strategy is wrong. That's an example.

wotsthat

mwpt wrote: »

We could approach this in another manner. If we examine London, could you describe the mechanism, backed with some simple calculations that allows house prices to increase vs average earnings YoY but retains monthly mortgage payments in line with historical norms? On this thread I'm advocating that it is lower interest rates that allow this to happen, but could you describe another mechanism?

I don't see how low interest rates can be driving house prices in London but not in Stoke. It's an odd theory that requires so many caveats to make it apply only to a single geographical region of the UK.

So if it is a factor it's junior to other, more obvious, drivers...

ukcarper

mwpt wrote: »

I think the graph I showed previously agrees with this yearly drop, but also shows an upward trend over multiple years.

We could approach this in another manner. If we examine London, could you describe the mechanism, backed with some simple calculations that allows house prices to increase vs average earnings YoY but retains monthly mortgage payments in line with historical norms? On this thread I'm advocating that it is lower interest rates that allow this to happen, but could you describe another mechanism?

The average was 3.13 in 2005 and 3.3 in 2207. Its the earnings of actual buyers that matter most of the fgures show house prices to median earnings in area.

Surely if low interest rates were the driver prices would be increasing everywhere

mwpt

wotsthat wrote: »

I don't see how low interest rates can be driving house prices in London but not in Stoke. It's an odd theory that requires so many caveats to make it apply only to a single geographical region of the UK.

And I on the other hand don't see that this is an argument against interest rates. I don't really have to explain why more people want to buy in one area than another area. If prices aren't going up in Stoke, but they are in nearby towns, then it's pretty simple that demand isn't pushing prices up in Stoke.

But like I say, I've described the classic theory and showed how I think lower rates means greater asset price affordability. Clearly we've established you all disagree, but now it would be good to fully show an alternative mechanism that allows monthly mortgage rates to remain the same or lower while asset prices inflate. I have a couple of ideas in mind but I'm curious to see what you guys come up with, if they match my alternate thinking. One starting clue is age of first time buyers. But, you also need to consider the circular argument in this alternate theory.