My first London flat (1988) is up for sale...

Fella

Although affordability may seem to be on a par, the big difference is that in 1990 you could expect regular large pay increases, so your salary would likely soon be much higher than when you originally bought. Hence the cliche you often hear older homeowners say "we struggled at first then it got easier". Nowadays however, pay rises tend to be in the 0-2% category. Someone on £40K now won't be on that much more in 5-10 years. Inflation no longer erodes the debt & that's the real problem for new homebuyers IMO.

westernpromise

Fella wrote: »

Although affordability may seem to be on a par, the big difference is that in 1990 you could expect regular large pay increases, so your salary would likely soon be much higher than when you originally bought. Hence the cliche you often hear older homeowners say "we struggled at first then it got easier". Nowadays however, pay rises tend to be in the 0-2% category. Someone on £40K now won't be on that much more in 5-10 years. Inflation no longer erodes the debt & that's the real problem for new homebuyers IMO.

It's a common misapprehension that people got pay rises that matched inflation but in fact this was never so. In the 70s we had 27% inflation and the government response was to impose a 10% wage rise limit on the public sector. The next year it was 5%.

I can't speak for others but I was 24 when I bought that flat, hence very early in my career. For the first couple of years my pay froze instantly as recession hit. I didn't get a meaningful rise until 1990, then didn't really get another until I was relocated overseas in 1994. In between I did indeed get 2 or 3% against a background of inflation of 11% and a mortgage rate of 16%

Believe me, a 3% pay rise on £24k when your mortgage has doubled to £12,000 a year is no fun. To the extent my pay did rise over the 10 years I owned that flat it was because a 30-something with 10 years' work experience is worth much more than a 24 year old with 3 years' experience.

The same happens today. If you are 40 then your pay probably does flatline, I'd agree - by that time you are what you are, workwise.

Conrad

So despite wars, strife, bird blue, recessions, Dot Com busts, high street demise, off-shoring and all the rest, life goes on and prices go up in the long run.

5 bed detached where I live were £5k in 1970. Today the average is £900k (much more is many cases).


All that bear energy expended on producing graphs and spread sheets, and yet the fundamental truth is as my Asian shop keeper says "you can't going wrong wid de propertee"

Andy_L

Would somebody doing the job now that you were doing then still be getting 160% of the average UK salary?

Edit: I see that's been answered. Note to self: read whole thread before posting

theEnd

Mad price, but I would argue that area is much better now than 20+ years ago.

Jason74

Fella wrote: »

Although affordability may seem to be on a par, the big difference is that in 1990 you could expect regular large pay increases, so your salary would likely soon be much higher than when you originally bought. Hence the cliche you often hear older homeowners say "we struggled at first then it got easier". Nowadays however, pay rises tend to be in the 0-2% category. Someone on £40K now won't be on that much more in 5-10 years. Inflation no longer erodes the debt & that's the real problem for new homebuyers IMO.

All true of course, regardless of what some might try and say to the contrary. Even if pay did nothing more than keep pace with inflation (and indeed, even if it didn't quite do that) the real value of the debt fell pretty quickly in a high inflation environment in a way it just doesn't at the moment.

And then of course there's the issue of interest rate. Yes, 15% rates were terrible, but at least if you were surviving them , there was the comfort that longer term, the only way was likely to be done. Of course, with things as they are today, any meaningful change of rates is likely to be upwards.

So even if day one affordability is similar to back then, the level of risk being taken by a homebuyer most certainly is not. The simple fact is that the value of the debt relative to income is likely to stay higher for much longer, while the risk of rate rises tipping people into unaffordability is much greater (and the chance of rate cuts providing meaningful relief exceedingly low).

There really can be no doubt that in London and the South East at least (while I disagree with 90% of what he posts, the point that Cells makes that this is largely a regional issue is probably a fair one) it is much harder for first time buyers to get on the property ladder without outside help than it has ever been.

lisyloo

Jason74 wrote: »

it is much harder for first time buyers to get on the property ladder without outside help than it has ever been.

So of you're a graduate early 20's with no career yet or kids that need grandparents then why not move somewhere else?

I'm at the other end of the working life (parents will die for certain) and when we are free of ties we will go elsewhere.
Perhaps it's a bit cushy for young people at home?

Is there a difference in expectation and less work ethic than a generation ago?

westernpromise

Jason74 wrote: »

And then of course there's the issue of interest rate. Yes, 15% rates were terrible, but at least if you were surviving them , there was the comfort that longer term, the only way was likely to be done. Of course, with things as they are today, any meaningful change of rates is likely to be upwards.

I see I need to labour the economic history lesson a bit more.

Over the 18 months to May 1988, UK rates changed 12 times. This happened because Nigel Lawson was shadowing the Deutschmark, trying to keep the £ at DM3.25 or thereabouts, using interest rates to target the exchange rate. There were 9 cuts and 3 rises, whereby rates fell by 3.5% to 7.375%. The constant rate-cutting poured cash into the economy and overheated it. From mid-1988 rates doubled and stayed at 14.875% for a year.

It was widely understood that it would take 2 to 3 years to squeeze that inflation out, hence we should have been out of the woods by 1990 or so. Instead, in 1990 we joined the Exchange Rate Mechanism, which meant we had to keep the £ within certain bands versus the DMark - exactly what had got us into trouble before. So rates were dropped in October 1990 when we joined the ERM, but only to just under 14%. Inflation was down to 6 or 7%. By the rule of thumb that your interest rates should be about 5% above your inflation rate - more than 5% in a boom, but less in a bust - our rates should have been maybe 9 or 10%, rather than 14%.

This disastrous error basically screwed the economy, stifled any recovery and completely explains most UK politicians’ reflexive latter-day aversion to currency unions. Only when the City rebelled and sold the £ so hard in September 1992 that it fell out of the eRM and all the way to DM 2.30 did the politicians capitulate. Rates went rapidly down and recovery started the next day.

So after 1990, there wasn’t any inflation; it’s just a renter myth. You did not get your employer saying Gosh, inflation’s 20%, so here’s a 25% pay rise. They said Gosh, inflation’s 3% but interest rates are 11% and we’re skint, so here’s f~ck all. A young graduate’s salary might go up, but only if s/he was getting more experience and becoming more marketable.

The ERM disaster - along with German reunification - kept UK interest rates so high that constructively, all mortgages were interest-only. At 15% interest rates over 25 years, a £72k mortgage cost £900 a month interest-only but just £922 a month repayment. That says it all about how much of the loan you were actually repaying.

For five years from 1988 to 1993, therefore, the picture for mortgagors was very, very bleak. We had rates that were far too high, and hence no chance of repaying the mortgage. It would have taken over 13 years, for example, for me to get my £72k mortgage down to £60k, which was my flat’s value in 1990. In 1990 there was no end to 15% mortgage rates in sight, because we were in the ERM. At today’s rates, it would take less than 5 years.

White Wednesday rescued us, gradually. As rates fell, people cleared more of their mortgages, prices stopped falling and people who’d had a bit of equity when the crash began became able to move: first those who bought in ‘84, then ‘85, then ‘86, then ‘87 became able to sell up, clear the mortgage, and trade up. Finally, in about 1998, so could I have done. Some had to wait 15 years.

Hence I don’t have a huge amount of sympathy for those who bellyache today about how much they have to borrow to buy. Almost nobody who does so has ever bothered to work out how astonishingly fast they will pay off the debt and accumulate equity. They just see a big initial number and 25 years and that’s all they see. The fact is that if you buy today with a 10% deposit, then in 5 years’ time the price could be 25% lower than now and you’ll still have no negative equity. You will be able to sell up and move on. That was what we could not do in the 80s and 90s, and it was because it took so long to make a dent in the mortgage that people like me got stuck in starter homes for so long. With these rates, frankly, negative equity is a risk for fewer people than last time and nor will it last as long if it does happen.

Jason74

lisyloo wrote: »

So of you're a graduate early 20's with no career yet or kids that need grandparents then why not move somewhere else?

I'm at the other end of the working life (parents will die for certain) and when we are free of ties we will go elsewhere.
Perhaps it's a bit cushy for young people at home?

Is there a difference in expectation and less work ethic than a generation ago?

In some cases, the bit about moving elsewhere is probably true. If you have no particular ties to London, then maybe moving there (or at least staying there long term) isn't the best move for some people if they don't earn the kind of money needed to be able to make the most of the city.

But for some, everything they knew and grew up with is in London. And while nobody has a God given right to live in a particular area, I do think people being unable to remain in the areas they grew up in and have families on account of the cost of housing is, in and of itself, a bad thing. I appreciate though that others will disagree here.

Finally, in respect of work ethic and expectations among the young, I'm certain that young people today are no less motivated and willing to roll up there sleeves to get on than was ever the case (and I'm in my 42, so I'm not "defending my own" on this one). I think expectations may be an issue to be fair, but even then I'm not so sure.

There are some studies have suggested that far from younger people pursuing posessions and experiences and being unable to get on the property ladder as a result, the issue is that younger people realise (generally correctly in some regions) that the deck is stacked against them to the point where they have no realistic prospect of achieving home ownership. Having come to that realisation, they then pursue other goals instead. That isn't unreasonable imho, although of course whether it's accurate is open to question.

Jason74

westernpromise wrote: »

I see I need to labour the economic history lesson a bit more.

Snip

I don't think it's a case of needing to "labour the economic history lesson a bit more". It's a case of I think you're wrong.

Nobody is denying that things were seriously horrible for a few years as a result of the high interest rates. We agree on that, and while you've provided the context of that accurately, there is nothing there that I didn't already know.

But from there, I have to disagree with you. Firstly , on wages, the evidence suggests that your view here is incorrect. Page 5 of this document ( http://www.ifs.org.uk/uploads/Presentations/Understanding%20the%20recession_230915/SMachin.pdf )suggests that real wages only fell very slightly in the early 90s (and not for very long). This by definition meant that nominal wages were increasing fairly significantly due to inflation, meaning that my point that the value of the loan repayment relative to income fell fairly quickly remains accurate.

In light of the above, I also feel that you've over egged the issue around the inability to overpay. You are right of course that the 72k at 15% would take 13 years to get to 60k. The Monthly payment would be c922 per Month. Overpaying by 80 per Month (something that would have been achievable within a couple of years given larger nominal pay increases than today) reduces the time to get down to 60k from 13 years to barely 5, which changes the dynamic completely.

And of course, you've completely ignored the issue of long term rates. Someone taking out a Mortgage in 1990 would have seen rates fall much lower than the level they took the Mortgage out at within 5-6 years, and then stay there for the rest of the Mortgage. This fact also of course is a factor in the large price rises since. For someone taking a Mortgage out now, there is little or no prospect of this, but there is a risk of much higher rates a few years down the line.

So your post doesn't change the two main assertions of mine. These are firstly that in the current environment, nominal pay rises are likely to be much less than for someone taking out a Mortgage today than for someone doing the same 20 or 25 years ago. And secondly, that rates for someone taking a Mortgage 20 - 25 years ago were materially lower for the majority of the Mortgage term than at the time the loan was taken out. This situation is unlikely to be replicated for those taking a Mortgage now, and indeed the reverse is a very real risk.

Given the above, it is a simple statement of fact that a buyer today is likely to face loan repayments that are a higher proportion of their income for longer than was the case at almost any time in the last 50 years or so.