House price crash

[kabbes]

Yeah, well, there's always a reason buried in there somewhere for the ups and downs. It'll go down and there will be a reason for that and it will go up and there will be a reason for that too.

I'll stick my neck out, though, and say that at some point in the next ten years, house prices will be a good 10% higher than they were even at their 2007 peak, let alone now. I find it hard to see the long-term trend being anything other than upwards for a good long while yet.

 

[ymu]

Yeah, well, there's always a reason buried in there somewhere for the ups and downs. It'll go down and there will be a reason for that and it will go up and there will be a reason for that too.

I'll stick my neck out, though, and say that at some point in the next ten years, house prices will be a good 10% higher than they were even at their 2007 peak, let alone now. I find it hard to see the long-term trend being anything other than upwards for a good long while yet.

It depends how soon we forget and start seeing self-declaration, 7xsalary, 125% mortgage type deals again. That's what caused the last crash and it's what caused this one. I followed the last crash quote closely because my mum got screwed by it - couldn't believe it when I saw these ridiculous lending practices come back.

My generation watched our parents get screwed by it, yet we were doing it all over again less than a decade later. I'm not sure our kids will be that dumb - but it depends a lot on what happens to banking when the dust settles.

 

[FreddyB]

We don't know what's happening with the rest of the economy, not really seeing as it's propped up with lots of government cash, when the cuts start after the election we'll have a better idea.

House price rises meant that people were getting richer just by sitting in the living room, many of them borrowed against these rises and spent the cash - that seems to have stopped.

 

[Chairman Meow]

Here in Ireland the market peaked in 2006 and has been crashing since. Prices are down around 45%, and many people believe falls of another 20-30% are probable. I know many people who were caught up in the property bubble here, people leveraged themselves to buy over-priced apartments, forgetting property prices can go down as well as up. there are many people in deap shit, a good mate of mine is in 100k negative equity already on the 2 bedroomed flat she bought in 2007. I was glad every single day that we resisted buying, hopefully in a year or two we will be able to buy somewhere very cheap and not be stuck in mortgage bondage for the next thirty years.

 

[Blagsta]

Anyone here selling/buying atm?

Just bought about 3 weeks ago.

 

[Blagsta]

There's a lot of truth in that.

So many people talked about how they had 'made' £XXXX on their house that year/month. It was nonsense to think that a value that you hadn't realised on a house you needed to live in counted as money in your pocket.

Basic Marx - exchange value vs use value.

 

[Cobbles]

They were right, but the BOE has kept rates at historically tiny levels. People on tracker mortgages, including landlords who would otherwise be in trouble, have been paying very little. As soon as rates rise, it all comes undone. This is not a new paradigm, prices will not plateau at a high level or keep going up until only 5 people in kensington can afford a house. It will crash hard.

When will rates rise? Dunno, I guess the new administration would want it to happen sooner rather than later.

Perhaps the Conservative Government will bring back MIRAS (gouged by "Prudence" just after he plundered private pensions for the tax to pay for his first bout of profligacy).

 

[Blagsta]

We don't know what's happening with the rest of the economy, not really seeing as it's propped up with lots of government cash, when the cuts start after the election we'll have a better idea.

House price rises meant that people were getting richer just by sitting in the living room, many of them borrowed against these rises and spent the cash - that seems to have stopped.

Marx again - fictitious capital.

 

[ymu]

Saying that - the relative and notional value of your house does have an impact on access to credit. So it does have some real value.

It also gives you a bigger deposit for the next house, which is what's helped inflate the housing market also. Yes, the next house will also be more expensive, but you've got a shedload of free money to put down as a deposit so you're in a much better position than someone who's having to save for a deposit.

 

[kabbes]

Bigger deposit only helps to a point, though. Particularly pre-2007. Back then, once you passed 20% it didn't make a great deal of difference.

I'm not sure what our discussion is about here. Is the current level of house prices problematic? Absolutely! Would we be better off if they all dropped 50% in real terms (slowly enough to not precipitate disaster)? Definitely! Are there reasons for the high prices that are down to foolish economic policy at the micro- and macro-levels? Totally! Does any of that mean that prices won't recover and surpass their recent positions? Not at all.

 

[ymu]

Bigger deposit only helps to a point, though. Particularly pre-2007. Back then, once you passed 20% it didn't make a great deal of difference.

A 20% deposit is very hard to find, and it's not just about interest rates. The deposit comes on top of what you can borrow - it increases the amount you can spend. Even if you don't max out the borrowing, you will always have a cheaper mortgage with a £100k deposit than you will with a £10k deposit.

I'm not sure what our discussion is about here. Is the current level of house prices problematic? Absolutely! Would we be better off if they all dropped 50% in real terms (slowly enough to not precipitate disaster)? Definitely! Are there reasons for the high prices that are down to foolish economic policy at the micro- and macro-levels? Totally! Does any of that mean that prices won't recover and surpass their recent positions? Not at all.

This crash is different from other recent crashes though. It's part of a global financial meltdown which was in large part precipitated by foolish lending practices, and not a small measure of fraud based on those practices. I'd be gobsmacked if we return to business as usual within a decade this time. The anti-regulators just aren't going to win this fight, IMO. Glass-Steagall was 1935, 6 years after the 1929 crash, and it lasted nearly 60 years. We will one day be as stupid again, but nowhere near as quickly as we became stupid again after the 1992 crash.

 

[kabbes]

This crash is different from other recent crashes though. It's part of a global financial meltdown which was in large part precipitated by foolish lending practices, and not a small measure of fraud based on those practices. I'd be gobsmacked if we return to business as usual within a decade this time. The anti-regulators just aren't going to win this fight, IMO. Glass-Steagall was 1935, 6 years after the 1929 crash, and it lasted nearly 60 years. We will one day be as stupid again, but nowhere near as quickly as we became stupid again after the 1992 crash.

It all depends what you mean by "stupid".

It comes down to what banks are willing to lend, like you are saying. But this really comes down to affordability. Historically, people have tended to pay about a third of their income for housing. So long as interest rates remain low (and, for that matter, so long as it is common for households to have a double income), there is a lot of scope for high purchase prices. With mortgage rates at 4%, for example, people can afford to pay 33%/4% = 8.25× joint income as a purchase price. Even more than that with a deposit on top.

Yes, it might ideally not be sensible to do this because interest rates could double and because actually paying off that level of debt will be very hard. But that isn't how a market works. If you are competing against other people who ARE willing to pay that kind of money then you either have to go along with it or accept that you are going to be renting. And then rents go up in line with purchase prices anyway, so you're fucked either way.

 

[ymu]

It all depends what you mean by "stupid".

It comes down to what banks are willing to lend, like you are saying. But this really comes down to affordability. Historically, people have tended to pay about a third of their income for housing. So long as interest rates remain low (and, for that matter, so long as it is common for households to have a double income), there is a lot of scope for high purchase prices. With mortgage rates at 4%, for example, people can afford to pay 33%/4% = 8.25× joint income as a purchase price. Even more than that with a deposit on top.

Yes, it might ideally not be sensible to do this because interest rates could double and because actually paying off that level of debt will be very hard. But that isn't how a market works. If you are competing against other people who ARE willing to pay that kind of money then you either have to go along with it or accept that you are going to be renting. And then rents go up in line with purchase prices anyway, so you're fucked either way.

Part of the regulators job is to prevent such silly practices. LTV and salary multipliers can be regulated.

 

[kabbes]

The regulation of multipliers is not always so straightforward. Not everybody has an obvious paycheck. And at what level do you set it? If somebody can afford 8× (if, for example, they are at the start of a career that they know will see their salary triple over the next decade), why should they be restricted to 3×?

Not to mention that it is a gift to buy-to-letters, who are on a completely different type of assessment to buyer-occupiers. They don't have to worry about a salary multiple, only rental yield. And those with cash in the bank will be laughing as they can outbid those without it.

A cap on salary multiples is a sensible idea but not necessarily so straightforward in practice.

 

[ymu]

The regulation of multipliers is not always so straightforward. Not everybody has an obvious paycheck. And at what level do you set it? If somebody can afford 8× (if, for example, they are at the start of a career that they know will see their salary triple over the next decade), why should they be restricted to 3×?

Not to mention that it is a gift to buy-to-letters, who are on a completely different type of assessment to buyer-occupiers. They don't have to worry about a salary multiple, only rental yield. And those with cash in the bank will be laughing as they can outbid those without it.

A cap on salary multiples is a sensible idea but not necessarily so straightforward in practice.

France restricts repayments plus loans/rent to 1/3 of net income, rather than using a salary multiplier. The maximum LTV is 70%, with some specialist lenders offering 85%. They don't seem to have a problem regulating this.

Belgium has summat like a 90% capital gains tax on housing to prevent it becoming a market for investors.

It's up to the regulators. It can easily be done.

 

[Gromit]

That graph makes me to want to thank my mother once again for spotting that 1995 was a good time for me to get onto the property ladder.

 

[kabbes]

As I said before, though, "repayments plus loans/rent restricted to 1/3 of net income" can easily end up being in excess of 8× salary.

 

[ymu]

As I said before, though, "repayments plus loans/rent restricted to 1/3 of net income" can easily end up being in excess of 8× salary.

How?

After tax and NI a medium-high earner sees about 60% of their gross income. 1/3 of this is 20%. That's a maximum multiplier of 5 if they have no other outgoings to take into account.

 

[kabbes]

But you aren't restricting it to medium-high earners.

It all rather depends on your tax system, to be fair. And I don't know the French tax system. But if we assume 75% rather than 60%for some income level or other (and bearing in mind that the tax system does change fairly regularly) then you end up with 75% × 33% / 4% = 6.25. Assuming that a LTV of 80%, you then end up with a house worth 7.8 × salary. A bit less than 8 then, but not too far off.

Of course, even a multiplier of 5 is more than a lot of sensible people would consider reasonable. I don't want to quibble around too much with numbers. I'll revise 8 down to 6 based on a tax rate that does not necessarily cost people 60%. Are you happy for people to borrow 6× salary?

(And, ironically, it is those who earn more and thus who are on higher tax rates that are MORE likely to be able to afford greater multiples!)

ETA: I've just realised that we are talking about borrowing levels, not total house price, so LTV is irrelevant. I wasn't thinking straight there. Sorry.

 

[ymu]

A multiplier of 3x maximum is much more sensible, I agree.

My point is that I don't think you can make predictions about the housing market based on a return to business as usual. I don't think that's going to happen. 1929 prompted some pretty fundamental shifts in the way the world of money worked and those reforms didn't start to unravel until the 1980s. I think you have to factor in major changes to the way banking will be allowed to work in future.

 

[ymu]

But you aren't restricting it to medium-high earners.

It all rather depends on your tax system, to be fair. And I don't know the French tax system. But if we assume 75% rather than 60%for some income level or other (and bearing in mind that the tax system does change fairly regularly) then you end up with 75% × 33% / 4% = 6.25. Assuming that a LTV of 80%, you then end up with a house worth 7.8 × salary. A bit less than 8 then, but not too far off.

Of course, even a multiplier of 5 is more than a lot of sensible people would consider reasonable. I don't want to quibble around too much with numbers. I'll revise 8 down to 6 based on a tax rate that does not necessarily cost people 60%. Are you happy for people to borrow 6× salary?

(And, ironically, it is those who earn more and thus who are on higher tax rates that are MORE likely to be able to afford greater multiples!)

ETA: I've just realised that we are talking about borrowing levels, not total house price, so LTV is irrelevant. I wasn't thinking straight there. Sorry.

It's the medium-high earners who dominate the housing market. Someone seeing 75% of their income after tax is earning below the median. They're not, on the whole, responsible for crazy house-price inflation.

And once more, it's got fuck all to do with affordability unless you think we're going to return to an unregulated free-for-all in the financial markets. It's to do with responsible lending practices and proper regulation.

 

[kabbes]

You might be right. But people have been singing me that same tune for more than 10 years. And if I'd have listened to them then I wouldn't have a house now.

 

[Gromit]

Ever noticed how mortgage payments are really expensive compared with your salary at the start and then over the years with inflation (and hopefully pay raises) become more and more manageble.

Wouldn't it make sense for someone to do a mortgage where you pay less early on and it ramps up over time instead of ramping down?

 

[ymu]

You might be right. But people have been singing me that same tune for more than 10 years. And if I'd have listened to them then I wouldn't have a house now.

You're saying that the predictions of a crash were wrong?

Predicting exactly when a crash will occur is very different to observing that business might have to be done differently once a crash of this magnitude has already occurred.

 

[Wolveryeti]

I think the government would do most everything in its power to prevent the likely type of events that would cause a house price crash of this magnitude (interest rate rises, macro deterioration). With the latter they may not have very much choice, but given their view of commercial bank lending as a major channel of policy transmission and essential precondition for economic health, I think they'd rather absorb the hit bank balance sheets were taking from delinquent mortgages rather than letting banks go fire-sale crazy and simultaneously enabling the crash and a large contraction in lending to happen.

 

[100% masahiko]

You might be right. But people have been singing me that same tune for more than 10 years. And if I'd have listened to them then I wouldn't have a house now.

Same here...
My only mistake was listening and happy to be renting. Man, wasted so much

 

[ymu]

Ever noticed how mortgage payments are really expensive compared with your salary at the start and then over the years with inflation (and hopefully pay raises) become more and more manageble.

Wouldn't it make sense for someone to do a mortgage where you pay less early on and it ramps up over time instead of ramping down?

The US had a lot of those sorts of mortgages. They're starting to reset to higher interest rates now, with a whole load of pain on the way.

In practice, most homebuyers don't live in the same place for their whole lives. Once they're earning more/needing more space for kids, they move somewhere bigger/better. Then, when they get older/the kids have left home they start downsizing and thinking about their pension arrangements, usually with the aim of owning the house outright by the time they retire.

 

[kabbes]

You're saying that the predictions of a crash were wrong?

You think that the predictions were right? Prices today are between two and three times that of ten years ago. Over the last 10 years, there has been one downturn that lasted a few years. The rest has been up, up, up. Even if you bought at the peak, your house would still be worth today pretty much what you paid for it then.

When my sister and her husband bought their house in 2001, my brother-in-law, who had just started as a fund analyst, was told by his boss that he should be fired for being so stupid as to buy a house given that a housing crash was so obviously imminent. People have been predicting house price armageddon forever and it hasn't happened yet.

 

[ymu]

You think that the predictions were right?

Yes. As I've already said, the crash in house prices has been slowed by the low interest rates encouraging investors with cash into the housing market, and by the fact that houses in massive negative equity just aren't coming onto the market because they cannot come onto the market - the big falls don't show up in the figures. It's by no means over yet.

There were BTL investors buying flats at 125% of their market value, with the seller giving them 25% back for the 20% deposit required. Most of that fictitious value hasn't shown up in price drops yet because those BTL investors cannot afford to sell up.

We're less than two years into this crisis. It'll take a fuck of a lot longer than that to see the long-term effects.

 

[ViolentPanda]

The threads predicting imminent house proce crashes are as cyclical as the market itself.

The last such crop of threads, coming at the peak of the market when the crash started, had lots of people predicting 40%+ drops in prices and the market to never recover. And yet here we are a few years later with prices having dropped by 20% and then having recovered most of it back again. So now the doomsayers are saying, "Ah, but it is temporary and they will collapse yet again and this time it really WILL be permanent!" Well, we'll see. But I'm not betting my house on it.

Heh, the Dravinian thread. He was looking forward to >50% price drops, and rubbing his hands together at the thought of cashing in, as I recall.
Ain't gonna happen in the south-east as long as demand outstrips supply quite so strongly, though.