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Debate House Prices
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Why it will be worse than before...
julz1982
Posts: 30 Forumite
This will be a bigger crash simply because it was a bigger bubble, the amount of "free money" thrown at anyone with a pulse to buy a house was truely astonishing. Every conventional rule was broken with regards to lending, 3x salary became, 4x or 5x, deposits from 10% minimum to 0% and actually the truely insane 125% mortgages from Northern Rock. BTL added to the mania, people borrowing hundreds of thousands of pounds and on interest only mortgages, as long as the rent covered the interest!
Well it has burst now, the money is simply not there to be lent and banks are finding massive holes in the balance sheets, RBS = £12BN rights issue! The thing is we have only just begun, it will get much much worse than this. The banks NEED to restore there asset ratios, its not optional, they have to. The problem is every single week the value of there assets (ie the deeds to the houses backing the mortgages) is falling, as it falls, they need to have lent out less, so they lend out less, and this means interbank rates rise, and ortgage rates rise, and less FTBs can buy a house, and house price falls further, etc etc etc. It is a vicious circle that has only just begun.
The reason it will take so much longer to work through the system than before is that time itself would normally reduce the liabilities of the banks, as in time people repay the loans capital back as well as the interest. With Interest only loans, they can keep meeting the repayments forever, but it wont in any way strengthen the banks balance sheet, the bank has still lent those people £X thousand, the only way to restore the ratios there is for the assets to rise, because the liability wont fall, and that isnt going to happen.
Im waffling a bit now, but my basic point is, and i dont think alot of people realise, becasue the loans were interest only, they will not ever help the banks restore the balance sheet, so this will take much much much longer to sort out than ever before. The average house price in real terms will AT LEAST half over the next two to three years. There just wont be the money to lend to people to afford anything more.
Well it has burst now, the money is simply not there to be lent and banks are finding massive holes in the balance sheets, RBS = £12BN rights issue! The thing is we have only just begun, it will get much much worse than this. The banks NEED to restore there asset ratios, its not optional, they have to. The problem is every single week the value of there assets (ie the deeds to the houses backing the mortgages) is falling, as it falls, they need to have lent out less, so they lend out less, and this means interbank rates rise, and ortgage rates rise, and less FTBs can buy a house, and house price falls further, etc etc etc. It is a vicious circle that has only just begun.
The reason it will take so much longer to work through the system than before is that time itself would normally reduce the liabilities of the banks, as in time people repay the loans capital back as well as the interest. With Interest only loans, they can keep meeting the repayments forever, but it wont in any way strengthen the banks balance sheet, the bank has still lent those people £X thousand, the only way to restore the ratios there is for the assets to rise, because the liability wont fall, and that isnt going to happen.
Im waffling a bit now, but my basic point is, and i dont think alot of people realise, becasue the loans were interest only, they will not ever help the banks restore the balance sheet, so this will take much much much longer to sort out than ever before. The average house price in real terms will AT LEAST half over the next two to three years. There just wont be the money to lend to people to afford anything more.
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Meanwhile, greedy owners have mentally banked that free magic money from house price growth and simply cannot get thier heads around actually giving away this free imaginary cash that only last year seemed so real.
I'm an owner yet I thinks it's better for society to have more affordable homes so thtose at the bottom stand a chance of reaching the first rung.
Greedy owners remind me of those type that are all smiles and love with freinds but that would fight thier siblings / relatives to the death for a cut of a will.0 -
The average house price in real terms will AT LEAST half over the next two to three years. There just wont be the money to lend to people to afford anything more.
Hmmm....scary stuff Julz...:eek:
Anything more you care to share
on how you get to the above presumption pls?
I'm interested, not idly challenging you - as I'm in a 'to buy or not to buy? that is the Q' scene right now myself.... Bless Martin's Little Cotton Socks. I thank him for giving us MSE. Look what its grown into!
MFW = ASAP #1240 -
Hi julz, whilst I don't disagree with your sentiments, and some of your points, I'm not sure I understand it all. Unfortunatley since I'm neither an economist nor an accountant, I can only query some of the thoughts rather than offer an concrete alternate view, so bear with me.
In the main for example I'd agree with that, except the last bit, from the banks perspective, whilst not ideal as long as the rent does cover the mortgage interest and the borrower pays that to the bank, then the bank is ok with it, though it does get problematic if the purchase was recent and property is performing as it is.This will be a bigger crash simply because it was a bigger bubble, the amount of "free money" thrown at anyone with a pulse to buy a house was truely astonishing. Every conventional rule was broken with regards to lending, 3x salary became, 4x or 5x, deposits from 10% minimum to 0% and actually the truely insane 125% mortgages from Northern Rock. BTL added to the mania, people borrowing hundreds of thousands of pounds and on interest only mortgages, as long as the rent covered the interest!Well it has burst now, the money is simply not there to be lent and banks are finding massive holes in the balance sheets, RBS = £12BN rights issue! The thing is we have only just begun, it will get much much worse than this. The banks NEED to restore there asset ratios, its not optional, they have to. The problem is every single week the value of there assets (ie the deeds to the houses backing the mortgages) is falling, as it falls, they need to have lent out less, so they lend out less, and this means interbank rates rise, and ortgage rates rise, and less FTBs can buy a house, and house price falls further, etc etc etc. It is a vicious circle that has only just begun.
Again whilst I can agree with the general jist, the banks are to date finding investment capital to shore up the balance sheets, again whilst this is not ideal for the bank as future profits must be split between more investors, it is what is and needs to be done due to the position they have put themselves in. The drought in lending currently being experienced would, from the banks' perspective be a temporary condition, until investor capital via rights offerings or share sales, or asset sales is in place, and until they can get some reasonable estimation of future losses from existing assets. As for the money not being there, the money never was there, that's how banks work, you deposit £100 and they lend £200 or £300, or whatever. They have always lent more than they have, the monetary system works on the principle that there will never be a time when everyone wants to hold in their hand the money that belongs to them, most of it is just numbers on a balance sheet.
This bit lost me a little, again the assets upon which the loan is based not rising is a problem, but only if the loan cannot be serviced. I you buy a house at £100,000 and over the course of your mortgage it rises to £1,000,000 this appreciation does the bank no good, unless you default and the bank forecloses. Similarly on the subject of an interest only mortgage, If you have £100,000 @ 6% IO in approximately 17 years you will have paid the bank back in full, if we ignore the costs of adminstering the loan, during the course of that time you will have paid the bank just over £100,000 which is what they loaned you, again from the banks view it is less than an ideal situation in this envoironment because of the risk of default, but it is the business banks are in. The more defaults there are the more this will be fed through to the solid mortgages, which may be a cause for those who are perhaps mid way through a mortgage to worry.The reason it will take so much longer to work through the system than before is that time itself would normally reduce the liabilities of the banks, as in time people repay the loans capital back as well as the interest. With Interest only loans, they can keep meeting the repayments forever, but it wont in any way strengthen the banks balance sheet, the bank has still lent those people £X thousand, the only way to restore the ratios there is for the assets to rise, because the liability wont fall, and that isnt going to happen.
Im waffling a bit now, but my basic point is, and i dont think alot of people realise, becasue the loans were interest only, they will not ever help the banks restore the balance sheet, so this will take much much much longer to sort out than ever before. The average house price in real terms will AT LEAST half over the next two to three years. There just wont be the money to lend to people to afford anything more.
The enormity of the situatiion may mean that surprisingly it actually takes less time to play out, rather than a slow death of a thousand cuts, it may be more death by a flailing broadsword, one can't fail to notice how fast Northern Rock and Bear Stearns went when the pressure hit.
The aftermath however may be something we live with for generations as most of what is left of this country will be owned by foreign interestsHope for the best.....Plan for the worst!
"Never in the history of the world has there been a situation so bad that the government can't make it worse." Unknown0 -
I'm seeing on this board as increasing use of the words "foreclose" or "foreclosure". Unless you are talking about the USA, it's "repossession", folks!...much enquiry having been made concerning a gentleman, who had quitted a company where Johnson was, and no information being obtained; at last Johnson observed, that 'he did not care to speak ill of any man behind his back, but he believed the gentleman was an attorney'.0
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neverdespairgirl wrote: »I'm seeing on this board as increasing use of the words "foreclose" or "foreclosure". Unless you are talking about the USA, it's "repossession", folks!
Apologies ndg, the product of living on a diet of US newsfeeds.
Hope for the best.....Plan for the worst!
"Never in the history of the world has there been a situation so bad that the government can't make it worse." Unknown0 -
It's not mere pedantry (not that I despise mere pedantry!) but there are significant differences between foreclosure and repossession in legal terms....much enquiry having been made concerning a gentleman, who had quitted a company where Johnson was, and no information being obtained; at last Johnson observed, that 'he did not care to speak ill of any man behind his back, but he believed the gentleman was an attorney'.0
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If you have £100,000 @ 6% IO in approximately 17 years you will have paid the bank back in full, if we ignore the costs of adminstering the loan, during the course of that time you will have paid the bank just over £100,000
Lots of points in there but this one stood out, actually as far as the bank is concerned you have not paid the bank back at all, you still owe them £100k, all you have done is serviced the debt for 17 years. This has not helped their lending ratio at all. They still have a £100k liability.
This is my point, every loan that was taken out to be paid back as interest only, will not be paying back the loans the banks made they will just be covering the costs. The banks need to have Assets of X to justify lending of Y (all banks have different ratios and i dont know them). They overlent and Y got way to big but they didnt mind as they thought X would cover it. It turns out X was in fact only worth x and its getting smaller all the time. Solution to keep ratios in tact and banks solvent is to reduce Y, but Y will not be reducing on any IO loans, Y will be the same. This is why the banks are instead making X bigger, through rights issues and Sovereign wealth funds.
This is why the mortgage market is so tight and will only get tighter, and it doesnt matter what someone would pay for your house last year, if this year they will only be loaned 90% at 3x their earnings, thats what you will get for it today. In a few years time, once everything has shaken down, fundamentals alone will stop the decline, that will be when houses are affordable, at 3x earnings.
All above is just my opinion, i have been wrong before and i will be wrong again, im not psychic, just making a prediction based on the facts as i see them. I see nothing that will stop the decline until then.0 -
neverdespairgirl wrote: »It's not mere pedantry (not that I despise mere pedantry!) but there are significant differences between foreclosure and repossession in legal terms.
there's a 6 letter word beginning with F I'd use to describe off plan new build BTL'ers
and it's not derived from foreclosure.It's a health benefit ...0 -
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