Moneyweek: Why this housing crash could be worse than the 1990s

HAMISH_MCTAVISH

Pobby wrote: »

Rates doubling? Sure nearly did in the early 90`s. Then of course we weren`t playing fantasy economics. The recession happened and it was `orrible but happen it did. 12% IRs were scary enough but in a strange way IRs of 0.5% are way scarier. Just what are we trying to hide?

Rates in double digits in the early 90's is the reason that housing crash was so severe and long lasting. And thankfully we have learned not to repeat that mistake.

At the time, the percentage of net income being spent on mortgage payments averaged 68%. Today it is just 30%......

Which is why low interest rates are the correct policy response if you want to avert a nasty crash and prevent a bad recession becoming a depression.

the_ash_and_the_oak

HAMISH_MCTAVISH wrote: »

Rates in double digits in the early 90's is the reason that housing crash was so severe and long lasting. And thankfully we have learned not to repeat that mistake.

At the time, the percentage of net income being spent on mortgage payments averaged 68%. Today it is just 30%......

Which is why low interest rates are the correct policy response if you want to avert a nasty crash and prevent a bad recession becoming a depression.

I was under the impression that while rates did hit 15% they hadn't been below 9% for years before that? Borrowing at 10% then having to pay at 15% on the same amount of capital 4 years later doesn't really seem much worse than borrowing at 4% and then having to pay at 6% imo

HAMISH_MCTAVISH

It should also be pointed out that house prices did in fact fall to slightly below the long term mean, before recovering to slightly above today.

So all we averted was the overshoot......

It should also be pointed out that there are three ways of measuring fair value for house prices.

1) Long term mean. (currently there or thereabouts)

2) House price to salary ratio. (currently higher than the long term average)

3) Mortgage payment to income ratio. (currently lower than the long term average.

In 2 out of 3 ways of measuring house prices, they are at or below the long term average.:beer:

And of the one where they are not, there are a lot of good reasons why that average may not be correct for the future....

treliac

the_ash_and_the_oak wrote: »

Did anyone who was paying 12% rates in the early 90s borrow the money at 6% though?

IIRC we borrowed at 10% and it went up to 15%.

What effect would a 5% rate rise have today?

HAMISH_MCTAVISH

the_ash_and_the_oak wrote: »

I was under the impression that while rates did hit 15% they hadn't been below 9% for years before that? Borrowing at 10% then having to pay at 15% on the same amount of capital 4 years later doesn't really seem much worse than borrowing at 4% and then having to pay at 6% imo

The important thing to look at is the percentage of net income being spent on mortgage payments, as this is what causes mass defaults (and perpetuates the crash) if it goes too high.

The average today is just 30%. At peak in 2007, with the base rate ten times higher than it is today, that figure was only around 40%. In the early 90's. the figure was more like 70%.

the_ash_and_the_oak

treliac wrote: »

IIRC we borrowed at 10% and it went up to 15%.

What effect would a 5% rate rise have today?

tbf I think its more appropriate to compare relative to amount borrowed. 1% to 6% is not comparable to 10 to 15% as the former is a quintupling of the amount borrowed. imo 10 changing to 15% is comparable to 4% changing to 6% - in both cases an increase of 50% on the amount initially borrowed

the_ash_and_the_oak

HAMISH_MCTAVISH wrote: »

The important thing to look at is the percentage of net income being spent on mortgage payments, as this is what causes mass defaults (and perpetuates the crash) if it goes too high.

The average today is just 30%. At peak in 2007, with the base rate ten times higher than it is today, that figure was only around 40%. In the early 90's. the figure was more like 70%.

A fair argument. The only question I have about this is - is that figure of net income across all mortgage holders? or just FTBs?

Pobby

the_ash_and_the_oak wrote: »

Did anyone who was paying 12% rates in the early 90s borrow the money at 6% though?

No it would be unlikely. IR`s always tended to average out around the 8% mark. 5% was deemed very, very low. 0.5%, never dreamed off.

Amazingly, I also agree with Hamish regarding the fact that if IRs were not so low then things would be a darn site worse.

A couple of my thoughts though. Is the 0.5% rate like putting an Elastoplast on a very deep wound.

SVRs are not very generous and therefore do not really reflect the BOE base rate. A chance for the lenders to balance their books?

2 to 3 year savings bonds are way above the base rate. Are the banks factoring quite large IR rises over the next few years?

treliac

the_ash_and_the_oak wrote: »

I was under the impression that while rates did hit 15% they hadn't been below 9% for years before that? Borrowing at 10% then having to pay at 15% on the same amount of capital 4 years later doesn't really seem much worse than borrowing at 4% and then having to pay at 6% imo

Rates were higher but on much lower property prices, so nothing like the sort of sums being borrowed in recent years were needed to be able to buy.

Also, income was carefully scrutinised to ensure affordability!

Pobby

treliac wrote: »

Rates were higher but on much lower property prices, so nothing like the sort of sums being borrowed in recent years were needed to be able to buy.

Also, income was carefully scrutinised to ensure affordability!

Up to a point. I borrowed 60k on a 75k house. I had zero proof of income as I was in my first year of trading.