Were there many STRs before/during the last crash?

Generali

EdInvestor wrote: »

Yes, and that's why there's so much pressure on King to get on the case of supplying funds to the system to keep Libor down.

Do you think that is likely to work? It didn't in Japan and hasn't so far in the US. You can't force privately owned banks to lend if they don't want to and the BoE is pushing this money through the private banking system (I mean as opposed to Govt channels).

My feeling FWIW is that the BoE is pushing on the proverbial piece of string and will continue to do so unless inflation targets are going to be ditched. Even then, printing money will make things worse not better. Inflation doesn't make anything better it just seems like it for a bit IMO.

I don't see an easy way out of this mess. The losses to the banking system are too great: we haven't reached the peak of ARM resets in the US yet for example and on top of that, falling prices mean that other borrowers that would in other circumstances sell to get out of trouble (eg became ill/lost job/screwed up) can't and so are reposessed when in other times they'd sell up and rent.

born_again_saver

Well, thanks for the lessons in history, everyone. I actually had no idea that the rules for private renting were so different back then. It helps to explain the unprecedented popularity of BTL in recent years.

I have to agree with bristol_pilot that I don't think the internet makes that much difference. I was only young at the time of the last crash (age 10-12), but I do remember people talking about it a lot, whenever there were new reports of price drops, repossessions and redundancies. The internet does perhaps widen the audience and the viewpoints in a discussion, so maybe people do come across ideas they wouldn't have previously, although I think many or most online discussions are simply mirroring discussions taking place offline (the good old house price conversations, anyone?).

Each crash is different and will suit the circumstances of the times, so I don't think it's very useful to predict for/against a crash on the basis of information from last time around. Still, times are uncertain and of course we all want to try and make sense of it however we can.

setmefree2

Benefits_Blagger wrote: »

and if mortgages were harder to get, where the bloody hell did people live!

In totally discusting rented accommodation - think "Rising Damp" and Rigsby without the comedy - grim :eek::o

Lotus-eater

benood wrote: »

Remarkable really, at the time it felt as if the world had ended and no one would ever be foolish enough to buy a house ever again.

Absolutely as I remember it, I'd like to remind those who just say, if there is a crash people waiting to buy will just snap up the bargains. Sentiment can change.

WTF?_2

bristol_pilot wrote: »

Pecentage wise, a rise to 6.65% would be the equivalent today.

That's my point really - that we don't need to have 15% interest rates today to have the same effect on house prices. The exact arithmetical equivalent is not the issue.

Yep - you almost have to laugh when people start squealing because interest rates have rocketed to almost 6% and the media starts calling for cuts en-masse.

When people have taken on massive levels of debt, even small upward changes in interest rates (at historically low levels) can land them in the same sort of trouble as double-digit rates did in the last crash.


What worries me is when the inflation caused by the bailouts of the banking system really starts to hit. All the money being pumped into the market will eventually spill over somewhere. Bubbles have never reflated and with the rising price of commodities and energy there's a real danger that the next bubble will be in that sector, making price rises even worse.

Also, those who STR face seeing their cash being eroded by inflation if the government keeps interest rates lower than they should be. That's assuming there's not a banking crisis.

PasturesNew

Yes, renting was dire. As a single person I couldn't afford a small place on my own unless I moved about 25-30 miles away and lived in the depths of the countryside on my own and it would need work doing, a LOT of work. And you couldn't get credit so there was no doing up a right tip without funds or skills.

I left my parents' house when I was about 27, when I managed to buy a mobile home.... the only one I could afford as even they were expensive.

Private rentals were very grim. Very damp. Very dingy. Very gloomy and depressing. No legislation to ensure any minimum standards.

Being single there was no council housing for me either, the list was 20+ years long even then for them to get me a room in a shared house.

I was lucky when I got the mobile home. No other single people were doing as well as me. Couples had managed to buy 1-bed property because they had two incomes. Also, couples could get council housing (even though they didn't have children). So they were all right Jack.

A friend of mine became a single mother at age 22. She rented a room in a house, her room was 8'x9'. There was no central heating. But she didn't feel hard done by. She was grateful that she had somewhere and was really proud that she could afford that room.

This was Cambridge/area, 1982-1990.

Many areas have a peculiar housing market due to an odd reason. With Cambridge house prices were high because of the Uni, yet wages for the little people were low because the Uni was the main employer. There was no minimum wage back then. The Uni owns most of the land in the town, so people lived in villages on the outskirts. Councils tended to build family homes and bungalows in the villages, which were for families and little old ladies.

So a single person had to rent an inadeqaute sh1tehole at greatly inflated prices, or stay with their parents.

When I was 30, I managed to get a studio house, on a council road 7 miles out of town. They only built two and it was all a new thing and I was SO lucky. I didn't know any other single person that was doing as well as me! I bought 50%. Mortgages were 3x a single person's salary. I sold it back to them 7 years later (1997) and was still in negative equity by 5% of the original price I bought it for.

Gorgeous_George

Generali wrote: »

PS - GG your rate chart won't show what happened to rates during the 'ERM crisis' (which seems much less of a crisis with 15 odd years of hindsight) as Black Wednesday was 16th September 1992.

I took the base data from the BofE website and averaged the previous six months in Excel. I first used the data on this thread where I used a more extensive date range.

GG

WTF?_2

Generali wrote: »

I don't see an easy way out of this mess. The losses to the banking system are too great: we haven't reached the peak of ARM resets in the US yet for example and on top of that, falling prices mean that other borrowers that would in other circumstances sell to get out of trouble (eg became ill/lost job/screwed up) can't and so are reposessed when in other times they'd sell up and rent.

The name of the game now is keep bailing out the boat using whatever comes to hand and hope for a miraculous rescue (it'd need to be a Deus Ex Machina) before the good ship 'Economy' sinks.

Either the banking system collapses (disastrous) in the near term or we end up in a long lasting recession with a high rate of inflation making things even harder and shredding savings.

In the very worst case, a hyperinflationary depression could grip the US having disastrous consequences for us too.

It's not looking at all rosy on the economic front and our standards of living look set to fall sharply in the coming years. It won't be pretty.

EdInvestor

Generali wrote: »

Do you think that is likely to work? It didn't in Japan and hasn't so far in the US. You can't force privately owned banks to lend if they don't want to and the BoE is pushing this money through the private banking system (I mean as opposed to Govt channels).

Clearly what's needed is time for the banks to write down these losses, while still generating adequate profits.Meantime they are cleaning up their loan books, getting rid of risky stuff and pulling in cash at the same time, cherrypicking their best clients and squeezing as much margin out of new lending as possible.It will take time until they are all sure that there are no hiddeen nasties in the system and start lending normally to each other, and that's where the BoE is needed, to keep supplying money for lending until this confidence returns.

As far as the impact on property goes, there seem to be three issues at work: the crunch, building oversupply and mortgage misselling. The US is in the worst state because it has high exposure to all three.

The UK market has medium exposure to the crunch by comparison, oversupply is limited to inner city new build flats, and misselling so far (mainly self cert) does not seem too serious.

If you look at Spain, it has a very serous oversupply problem, but no mainstream credit crunch problem as local banks were not allowed to securitise. It may have some crunch/misselling effects via Costa property bought by expats with UK mortgages.

So each market is likely to react differently, it's really not appropriate to extrapolate from the US to the UK IMHO much less Japan where the bubble was so massive that it was always going to take decades to clear, even without their cultural problems..

EdInvestor

When looking at spikes in interest rates and their effect then and now, you need to take account of the "front end loading" problem which applied then but doesn't now.

From a speech by Stehen Nickell, formerly on the MPC

Second, the disappearance of the front end loading problem when inflation rates and nominal interest rates are low. For example, it might be quite sensible for young professionals to borrow, and for banks to lend them, four or even five times annual earnings to purchase a house given both their very high level of job security and their very rapid rate of prospective earnings growth. But in times of high inflation and high nominal interest rates, this is not possible.

For example, suppose real interest rates are 3%. Then if inflation is 12% and
nominal interest rates are 15%, a person borrowing four times their annual pre-tax salary will be paying over 60% of this pre-tax salary in mortgage payments in the first year – this simply cannot be done. Of course, in later years this proportion will fall rapidly.Nevertheless, the early years will provide a binding constraint on the multiple of earnings households can borrow.

In a low inflation environment, this binding constraint disappears. If inflation is 2% and nominal interest rates are 5%, an individual borrowing four times their annual salary will only be paying 20% of it in mortgage payments in the
first year. Perfectly possible. So the elimination of this constraint as we have gradually moved from a high inflation, high interest rate era to a low inflation, low interest rate period will have raised the demand for housing in equilibrium, even when real interest rates remain unchanged.

http://www.bankofengland.co.uk/publications/speeches/2004/speech227.pdf

For example.Take a couple with a gross joint salary of 50k and an average mortgage of 150,000.

@4% they pay 6,000 in interest a year, a very comfortable 12% of joint gross salary
@8% they pay 12,000 a year, a big leap up to 24% of their joint gross salary but manageable.

Here's why it was different last time:

@10% interest they paid 15,000 interest a year - a high 30% of their joint salary
@15% their interest payments rocket to 22,500, almost half their joint gross income and completely unaffordable

Even if iinterest rates double, today's homeowners will still be better off than what was considered normal in the 1980s well before the crash.

So why should there be a crash now?