house price question re interest rates

the_mixer

If interest rates go up and house prices go down, is there really much benefit if the monthly payments stay the same?

Like if you wanted to buy a house at 200k but say it falls to 160k within a year, but this is offset by interest rates rising two percent. 

Is there a name for this (nominal house prices?) and does anyone really benefit? FTBers have a smaller depsoit perhaps, but still pay the same.

this might seem dense but I'd never really factored it in when thinking of the possibilities of a housing crash/correction.

HotPantsCruiser

Good question, maybe someone will break down the variables?

Slithery

the_mixer said:

...and does anyone really benefit?

Cash buyers do.

MobileSaver

the_mixer said:

If interest rates go up and house prices go down, is there really much benefit if the monthly payments stay the same? FTBers have a smaller depsoit perhaps, but still pay the same.

As @Slithery says, the winners are always cash buyers.

If prices are falling then it's harder to get a mortgage because lending criteria is tightened. Similarly if interest rates are rising then affordability stress-testing also makes it harder to get a mortgage so a double-whammy.

BikingBud

the_mixer said:

If interest rates go up and house prices go down, is there really much benefit if the monthly payments stay the same?

Like if you wanted to buy a house at 200k but say it falls to 160k within a year, but this is offset by interest rates rising two percent. 

Is there a name for this (nominal house prices?) and does anyone really benefit? FTBers have a smaller depsoit perhaps, but still pay the same.

this might seem dense but I'd never really factored it in when thinking of the possibilities of a housing crash/correction.

Don't you want to control what you can, ie pay less?

We have no control over interest rates but if the starting debt is lower then we pay less back and total amount paid is lower.

If you take out a higher loan then as the rate rises you started from a poor position and it gets worse.

MobileSaver

BikingBud said:

Don't you want to control what you can, ie pay less?

I think that's part of the problem; these days people don't actually want to pay less if that means they have to compromise on their comfort/convenience/bragging-rights.

With property there are lots of affordable houses around but we're always hearing on these forums that everything is too expensive; it's only when you dig deeper you discover, for example, the complainer wants to buy in one of the most expensive parts of the country while being a below-average wage earner buying on their own.

It's not just property but lifestyles in general; how many people actually need a brand new car or latest iPhone yet they still buy those things when they could easily pay much less for a perfectly functional car or phone...

HotPantsCruiser

MobileSaver said:

the_mixer said:

If interest rates go up and house prices go down, is there really much benefit if the monthly payments stay the same? FTBers have a smaller depsoit perhaps, but still pay the same.

As @Slithery says, the winners are always cash buyers.

If prices are falling then it's harder to get a mortgage because lending criteria is tightened. Similarly if interest rates are rising then affordability stress-testing also makes it harder to get a mortgage so a double-whammy.

Why? Surely banks will keep lending, a borrower who was a good prospect on a big mortgage debt at low rates will still be a good prospect on a smaller debt at slightly higher rates?

HotPantsCruiser

BikingBud said:

the_mixer said:

If interest rates go up and house prices go down, is there really much benefit if the monthly payments stay the same?

Like if you wanted to buy a house at 200k but say it falls to 160k within a year, but this is offset by interest rates rising two percent. 

Is there a name for this (nominal house prices?) and does anyone really benefit? FTBers have a smaller depsoit perhaps, but still pay the same.

this might seem dense but I'd never really factored it in when thinking of the possibilities of a housing crash/correction.

Don't you want to control what you can, ie pay less?

We have no control over interest rates but if the starting debt is lower then we pay less back and total amount paid is lower.

If you take out a higher loan then as the rate rises you started from a poor position and it gets worse.

Yes, some people could find themselves in financial difficulties if that happens?

MobileSaver

HotPantsCruiser said:

MobileSaver said:

If prices are falling then it's harder to get a mortgage because lending criteria is tightened. Similarly if interest rates are rising then affordability stress-testing also makes it harder to get a mortgage so a double-whammy.

Why? Surely banks will keep lending, a borrower who was a good prospect on a big mortgage debt at low rates will still be a good prospect on a smaller debt at slightly higher rates?

Because house prices don't just fall in isolation to the rest of the economy.

As I said, even if banks don't change their own lending criteria, the affordability stress-testing will kick in and less people will be eligible for a mortgage as interest rates rise.

In practice, lenders do change their lending criteria and they will become much more risk-averse if house prices are falling so even less people will be eligible for a mortgage.

Fundamentally though, if house prices are falling it is normally because the economy is struggling which means that many of those "borrower who was a good prospect on a big mortgage debt at low rates" are now no longer in a position to get a mortgage anyway because their monthly pay cheque has either stopped entirely, dropped significantly or is now much more erratic.

Thrugelmir

the_mixer said:

Like if you wanted to buy a house at 200k but say it falls to 160k within a year, but this is offset by interest rates rising two percent. 

Depends on the amount of your mortgage. Those with large mortgages in an era of rising rates will be the losers. If prices were to fall. 

HotPantsCruiser

MobileSaver said:

HotPantsCruiser said:

MobileSaver said:

If prices are falling then it's harder to get a mortgage because lending criteria is tightened. Similarly if interest rates are rising then affordability stress-testing also makes it harder to get a mortgage so a double-whammy.

Why? Surely banks will keep lending, a borrower who was a good prospect on a big mortgage debt at low rates will still be a good prospect on a smaller debt at slightly higher rates?

Because house prices don't just fall in isolation to the rest of the economy.

As I said, even if banks don't change their own lending criteria, the affordability stress-testing will kick in and less people will be eligible for a mortgage as interest rates rise.

In practice, lenders do change their lending criteria and they will become much more risk-averse if house prices are falling so even less people will be eligible for a mortgage.

Fundamentally though, if house prices are falling it is normally because the economy is struggling which means that many of those "borrower who was a good prospect on a big mortgage debt at low rates" are now no longer in a position to get a mortgage anyway because their monthly pay cheque has either stopped entirely, dropped significantly or is now much more erratic.

We are being told that the economy is booming though?

https://www.bbc.co.uk/news/business-60344573

...and that inflation is hitting 30 or 40 year highs? That will push up interest rates which must push down house prices, but all without a "recession" as you describe? Isn`t the problem just simply that house prices are too high and won`t withstand interest rate rises?