There won't be a crash

Jack_Johnson_the_acorn

I bought my property 5 years ago.

I paid £127,000.00. The mortgage term is 30yrs. The initial fix cost £611 for 2 yrs. the rate was 4.99%.

Today I took out a new fixed term. Never in my wildest dreams did I think or expect my payments 5 yrs later to be £436pcm.

I planned for interest rate upto 10% not knowing in 2011 how much mortgage rates would drop, I would imagine most people in my position have done the same.

Prices have increased in all areas of the country since 2011. People who buy at peak price today are constantly warned of the possiblilty of interest rate increases and have to pass incredibly stringent affordability tests. I therefore see no reason for a crash widely talked of in these forums.

What needs to happpen in your opinion to cause the property market to collapse?

westernpromise

I can't see an obvious economic factor that would have that effect. What is likelier is that the taxes applied to property continue to mount, so that it becomes impossible to keep somewhere you already own.

Kayalana99

Interest rates going up affect everything, discourages businesses from popping up everywhere using cheap lending facilities, most likey will have a detrimental effect on house prices (and commercial property too)

You sound like you were really smart about your purchase, but in reality a huge percentage of people are eyeballed in debt and living month to month.

Not saying if a crash is going to happen or not, but I think it's a bit naive to say their 100% won't be either.

Conrad

Jack_Johnson_the_acorn wrote: »

What needs to happpen in your opinion to cause the property market to collapse?

Property crashes require a significant shock.


In 1987 we had black Monday
1991 we crashed out the ERM
2008 the credit crunch




We've learned lessons from all three, particularly the first 2 whereby Govts are much more cautious about putting up interest rates


The 3rd example, the credit crunch, could happen againwhen too much greed and heat gets into the system, but so what?

So what if prices temporarily fall?


If you look at the CML repossession stats, a tiny minority of people ever lose their homes, so again, so what?


Another crash will come along, and most will ride it out.
The last crash gifted us super low interest rates.




Now I'm not saying buy near a peak - I'm ever mindful not to do this and was talking about this prior to previous crash (yes I really was)


I tend to think the time to stop buying is when you go to a BBQ and it seems everyone is investing and saying property can only go up, step back and think



So bar a shock I can only see decent growth for a good while yet

Jack_Johnson_the_acorn

Kayalana99 wrote: »

Interest rates going up affect everything, discourages businesses from popping up everywhere using cheap lending facilities, most likey will have a detrimental effect on house prices (and commercial property too)

You sound like you were really smart about your purchase, but in reality a huge percentage of people are eyeballed in debt and living month to month.

Not saying if a crash is going to happen or not, but I think it's a bit naive to say their 100% won't be either.

Thank you I certainly like to plan things effectively and with much caution.

When I say there won't be a crash, I'm talking about a 30% drop in prices where they stay that price over a sustained period of time.

In 2008 we had a massive financial crisis and prices dropped upto 30% in some areas but by 2011 prices where back on the rise. In some places today, prices are more than 80% higher than what they where in 2008. So I wouldn't describe 2008 as a HPC otherwise everyone on that HPC website would be homeowners.....

westernpromise

In 1987 Nigel Lawson started shadowing the Deutschmark and cutting and raising interest rates quite markedly to achieve this, effectively and without notice substituting an exchange rate management monetary policy for an anti-inflation monetary policy. As a result, he cut rates at a time he should have been raising them, inflation started to rise, and base rates went from 7% to 15% to contain it, in about a year from 1988 to 1989.

In the crash that ensued it should be remembered that much of the "value" wiped off houses had only been put on in the last year or so due to too-low rates and the abolition of double MIRAS relief, which everyone piled in to secure.

What persisted the crash was that in 1990 we joined the ERM, so having caused a crash by ignoring inflation and chaining ourselves into a fixed exchange rate, we tried to fix it by ignoring inflation and chaining ourselves into a fixed exchange rate. As a result, having had interest rates far too low for our inflation rate in 1988, we had rates far too high for our inflation rate from 1989 to 1992. Rates were high across Europe at the time because Germany re-unified. Germany borrowed money to fund it, which mean higher interest rates rather than higher taxes, and because we had chained ourselves to their currency at a fixed rate our rates had to be high too, to no benefit.

On White Wednesday the markets rightly concluded that the exchange rate policy doing so much damage to the economy was unsustainable, and bet the pound would fall out. It did, rates were then lowered and the recovery began immediately.

With fiascoes like that in recent memory it should be no surprise that no British government was ever likely to join the Euro (and neither of course will any currency union with an iScotland be contemplated). But if you look back at what actually occurred, it is quite clear that huge errors were made both on the way up and the way down, and were coupled with a completely unexpected external shock (the fall of the Berlin Wall). So you really had to be going it some to bring about a 30% price crash.

Could that happen again? Sure, it will at some point, but right now I'm not seeing the economic shock unless there's a repeat of the banking crisis, and the Berlin Wall type shock is innately unforeseeable. What is foreseeable is that some sort of tax attack could be mounted on home owners with, as we've seen with SDLT, baleful effects rippling out across the whole market.

macca1974

The only a housing market crash can happen is if people are willing or perhaps forced to sell their houses at a much lower price than they are currently valued at. If you brought your house for £150K and then all of a sudden prices "fell" to £120K and you wouldn't pay off the mortgage if you sold, I would be very surprised if many people would see. So the prices wouldn't fall (if that makes sense). I think that because houses are brought with borrowed money, this in many cases does insulate against a crash (alongside demand / supply constraints as well).

The only way I could see there being a big reduction in house prices across the board would be if there was a massive rise in interest rates. At that point, if people couldn't afford the mortgages any more and lots and lots of houses were repossessed, then you could see prices tumbling. But in reality, that just isn't going to happen as interest rates are not going to be raised to the point that people can't afford their mortgages. Well...unless we get some Weimar Republic style hyperinflation, but thats unlikely!

westernpromise

Transaction costs are now so high, though, that someone selling to downsize has a strong incentive not to. If you were planning to sell at £1.5 million and downsize to a million, and there's a price fall such that you're downsizing from £1.2 million to £800k, you've lost £100k of your downsize money. But the transaction costs - agents, surveys, moving costs - and the taxes - SDLT - still eat up much the same of that remaining cash as they did before. Downsizers are likely to be left with insufficient cash to compensate them for living in a smaller space. So a general fall would, as in the past, lead to a further fall in the amount of stock on the market.

There is also the point that when we had a serious crash last, in 1989, arguably we were at a point where everyone who wanted to buy had already done so. That's not so now, where lots of people want to buy and haven't, and would be quite likely to buy in as soon as prices softened.

Both strike me as things that would tend to hold prices up.

Rich2808

macca1974 wrote: »

The only a housing market crash can happen is if people are willing or perhaps forced to sell their houses at a much lower price than they are currently valued at. If you brought your house for £150K and then all of a sudden prices "fell" to £120K and you wouldn't pay off the mortgage if you sold, I would be very surprised if many people would see. So the prices wouldn't fall (if that makes sense). I think that because houses are brought with borrowed money, this in many cases does insulate against a crash (alongside demand / supply constraints as well).

The only way I could see there being a big reduction in house prices across the board would be if there was a massive rise in interest rates. At that point, if people couldn't afford the mortgages any more and lots and lots of houses were repossessed, then you could see prices tumbling. But in reality, that just isn't going to happen as interest rates are not going to be raised to the point that people can't afford their mortgages. Well...unless we get some Weimar Republic style hyperinflation, but thats unlikely!

Most people move once every 20 years on average - and most owners I would assume therefore are sitting on large equity. Its only a small proportion of people who bought in the last 3-4 years at astronomical prices who would take any hit - they probably won't be moving anyway in that scenario given their negative equity.

And its all about relativity anyway. Your house was worth £400k - it drops by 25% so it falls to £300k. But that bigger house you want to buy which was £600k is now only £450k. So you actually have £50k less to find to buy it (£150k vs £200k) than before the crash. So by house prices dropping 25% you save £50k! A bit of basic maths really!

Not saying there will be a crash - merely that its not that simple.

Thrugelmir

macca1974 wrote: »

The only way I could see there being a big reduction in house prices across the board would be if there was a massive rise in interest rates. At that point, if people couldn't afford the mortgages any more and lots and lots of houses were repossessed, then you could see prices tumbling. But in reality, that just isn't going to happen as interest rates are not going to be raised to the point that people can't afford their mortgages.

Markets in reality require a low transaction volume to trigger a slide downwards. 15% is enough. Wages aren't growing very fast across the board. So interest rates could inflict pain with just marginal increases. Then there's the ageing population with many planning to downsize. As it's their pension pot. Brexit exodus with many deciding to leave on their own accord. Finally there's the interest only brigade. No repayment plan. Heavily in debt or retired. Perm lots of factors together and who knows. Never be complacent as you'll never know when the tide will turn.

westernpromise

Tides go in and out. Over the last 70 years the trend has been all one way, with periodic retracements but an obvious direction.

Timing this market is a mug's game. The most advantageous position to be in is to buy and hold for a long time.