House price crash

[kabbes]

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.

Well in the meantime, I've had a house for 10 years and will continue to do so. And the value of it will have to drop by 60% to get down to its 2000 level, which I can't imagine is about to happen any time soon.

The doomsayers were all telling me not to buy a house in 2000, just like they are all saying not to do so now.

 

[Gromit]

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.

Hmm you just remindd me of a friend who split from his wife is sitting on his half of the equitity from selling and splitting the house.
He was renting whilst waiting for the envitable drop. That was ages ago.

 

[kabbes]

I have a number of friends who were checking out the market but elected not to buy a house in about 2003-2005. They're still waiting. Maybe they'll make their move when this mythical big crash comes, but it's going to have to be a MIGHTY big one to justify it.

 

[ymu]

Well in the meantime, I've had a house for 10 years and will continue to do so. And the value of it will have to drop by 60% to get down to its 2000 level, which I can't imagine is about to happen any time soon.

The doomsayers were all telling me not to buy a house in 2000, just like they are all saying not to do so now.

As I said, predicting the exact timing of a crash yet to come is absolutely not the same thing as predicting that it will not be business as usual in the housing market when the kinds of irresponsible lending practices that led to the boom have already brought the world economy to its knees.

 

[ViolentPanda]

As I said, predicting the exact timing of a crash yet to come is absolutely not the same thing as predicting that it will not be business as usual in the housing market when the kinds of irresponsible lending practices that led to the boom have already brought the world economy to its knees.

I have to admit that my main interest is in what mechanism brings about a crash, and whether there are any policy prescriptions acceptable within a neo-liberal economy (FWIW, I don't believe there are) that could help govt to "manage" the crash in such a way as to ameliorate the damage.

 

[ymu]

Hmm you just remindd me of a friend who split from his wife is sitting on his half of the equitity from selling and splitting the house.
He was renting whilst waiting for the envitable drop. That was ages ago.

That's just about getting your timing right. We've been renting a boat since we sold the house, mainly because we knew fuck all about boats beforehand and wanted to make sure we made a sensible decision when we finally bought one. The side-benefit of doing this is that boat prices have dropped by more than we've spent on rent in that time - by more than we lost out by putting the house on the market when Lehman's went bust, in fact.

Northern Rock was a pretty good indicator for people who were in the bubble. For people wondering whether to join it before it burst, the decision on timing was much trickier.;

 

[ymu]

I have to admit that my main interest is in what mechanism brings about a crash, and whether there are any policy prescriptions acceptable within a neo-liberal economy (FWIW, I don't believe there are) that could help govt to "manage" the crash in such a way as to ameliorate the damage.

We're fucked because our housing market was so insane to start with - it's been nowhere near this bad most places. I'd like to see a Belgium-style CGT tax on housing that prevents it being used as an investment vehicle and strict lending rules on LTV and income multiples. Unlikely to be acceptable. We'll end up somewhere between that and a completely unregulated free-for-all, with whatever level of economic stability we deserve as a result.

 

[A Dashing Blade]

. . I'd like to see a Belgium-style CGT tax on housing . . .

Second homes ARE subject to CGT in the UK

 

[ymu]

Second homes ARE subject to CGT in the UK

I said "Belgium-style". Summat like 90% CGT on any housing. It means that investors can't fuck around with the housing market.

 

[kabbes]

I said "Belgium-style". Summat like 90% CGT on any housing. It means that investors can't fuck around with the housing market.

So I'm 21 and I buy a starter home with my new wife. 7 years later, I'm ready to trade up and get more of a family home. But at that point I'm saddled with an enormous CGT bill just because the housing market happened to go up in the meantime? Despite the fact that the increase in prices also means that my new house is ALSO much more expensive?

Bugger that.

 

[Barking_Mad]

what goes up, must come down. Eventually.

 

[ymu]

So I'm 21 and I buy a starter home with my new wife. 7 years later, I'm ready to trade up and get more of a family home. But at that point I'm saddled with an enormous CGT bill just because the housing market happened to go up in the meantime? Despite the fact that the increase in prices also means that my new house is ALSO much more expensive?

Bugger that.

The whole point is that there is no huge increase in price because housing is not a viable investment vehicle when most of the profit goes in tax. It's housing, not an investment.

You're not left with a bill. You hand over 90% of the free money you made just for being a home-owner.

 

[kabbes]

The whole point is that there is no huge increase in price because housing is not a viable investment vehicle when most of the profit goes in tax. It's housing, not an investment.

House prices will still rise, because wages increase over time and even if all else is held equal, house prices will follow wages.

Through the well-documented year-on-year increase in the demand vs. supply into the mix and you have a recipe for increasing prices that owes nothing to investment vehicles.

Buy a house and wait 7 years and even if we had a very well regulated and orderly housing market, the house would still have gone up a lot in price in that time. And you'll be hit for CGT on the difference.

 

[kabbes]

You're not left with a bill. You hand over 90% of the free money you made just for being a home-owner.

Ooh, this is new.

It's not free money. You've made nothing. You have to pay over money for your new house too, you know. The only way you have made money is if you are downsizing or otherwise have found a way to not have to live anywhere.

 

[Chairman Meow]

I have a number of friends who were checking out the market but elected not to buy a house in about 2003-2005. They're still waiting. Maybe they'll make their move when this mythical big crash comes, but it's going to have to be a MIGHTY big one to justify it.

I thanks all the gods every day that I didn't buy a house in 2003-2005 as I would now be in massive negative equity like two fifths of all mortgage holders in Ireland. I wouldn't fancy being in this recession with over 100k negative equity, which I would have if I had bought in 2006. There are plenty of people here committing suicide because of this shit, its not a gamble that you want to be on the wrong side of really.

 

[ymu]

House prices will still rise, because wages increase over time and even if all else is held equal, house prices will follow wages.

Through the well-documented year-on-year increase in the demand vs. supply into the mix and you have a recipe for increasing prices that owes nothing to investment vehicles.

Buy a house and wait 7 years and even if we had a very well regulated and orderly housing market, the house would still have gone up a lot in price in that time. And you'll be hit for CGT on the difference.

Of course they'll still rise - in line with wage inflation, just like rents do. Is there any reason you think you should be paid for living somewhere?

Taking mortgage and other costs into account, I got paid £2k per year for being a home-owner, compared to the £6k per year it would have cost me to rent somewhere equivalent. There's no moral justification for that, and no reason at all why the relatively wealthy should enjoy negatively priced housing whilst the poor pay through the nose for it.

 

[ymu]

Ooh, this is new.

It's not free money. You've made nothing. You have to pay over money for your new house too, you know. The only way you have made money is if you are downsizing or otherwise have found a way to not have to live anywhere.

I just sold up. Guess what, it's real money, and I didn't earn a penny of it.

 

[kabbes]

I just sold up. Guess what, it's real money, and I didn't earn a penny of it.

Yes, but you now have to live somewhere else, don't you?

OK, you have chosen to downsize. But that isn't generally the case. When I sell next, it won't be to take the money and run. It will be to move somewhere else. My house rising in value is worth absolutely nothing to me. In fact, it's a bad thing because it makes buying my next place ever more expensive.

 

[kabbes]

Of course they'll still rise - in line with wage inflation, just like rents do. Is there any reason you think you should be paid for living somewhere?

This is nonsense. You're basically making it cheaper for first time buyers to buy somewhere than for upsizers. Under your system, you're better off not buying a place to live at all until you want to move to your final house. And woe-betide you for wanting to up sticks and move elsewhere in the country. Buying the same value house elsewhere? Tough shit! You're still going to be walloped for 90% of the value of wage rises in the time you've been living in your house even though you are moving to exactly the same house somewhere else!

Taking mortgage and other costs into account, I got paid £2k per year for being a home-owner, compared to the £6k per year it would have cost me to rent somewhere equivalent. There's no moral justification for that, and no reason at all why the relatively wealthy should enjoy negatively priced housing whilst the poor pay through the nose for it.

This is showing a lack of understanding of the complete financial situation of buying versus renting. Actually, you may well do much better financially to rent rather than to buy. It depends totally on house price inflation vs. mortgage rates vs. alternative investments, plus mortgag rates vs. rental yields.

I've been through the calculations numerous times before on U75, so there is plenty there to look up if you are so inclined. But as a short snippet, you have to make sure that you include ALL the costs of buying and make sure that you really do compare like with like, i.e. you include the results of investing capital that you would have sunk into a deposit when looking at the cost of renting. People very rarely properly compare like with like.

 

[kabbes]

Here's a little example to work through, if you are so inclined:

House price £200,000.
Deposit 10%
mortgage rate 6%
House price inflation 5%
Initial rental yield 4%
Rental increases at RPI = 3%
Alternative investment in stockmarket yields 10%.

After 5 years, are you better off having bought or having rented?

 

[cesare]

Sums Gis a clue.

 

[ymu]

Yes, but you now have to live somewhere else, don't you?

OK, you have chosen to downsize. But that isn't generally the case. When I sell next, it won't be to take the money and run. It will be to move somewhere else. My house rising in value is worth absolutely nothing to me. In fact, it's a bad thing because it makes buying my next place ever more expensive.

It's still real money, whatever you decide to do with it next. You might have to reinvest it all in the next house, but you're still knocking whatever amount it is off the loan and increasing your equity when you do eventually downsize, as most people will by the time they retire.

If I hadn't bought when I did, I wouldn't be able to buy a boat for cash now. I could just as easily use the cash for a deposit on a house - something I would not have been able to do if I hadn't bought when I did and lucked out on timing. It's free money.

 

[FridgeMagnet]

Yes, but you now have to live somewhere else, don't you?

OK, you have chosen to downsize. But that isn't generally the case. When I sell next, it won't be to take the money and run. It will be to move somewhere else. My house rising in value is worth absolutely nothing to me. In fact, it's a bad thing because it makes buying my next place ever more expensive.

If property prices are going to fall you and a lot of other people are going to be on the position of either not moving, or having to put a vastly greater amount of money into buying the next property; there's just no way round that as I'm sure you're aware. And that's why you'd have to have some sort of suicide government to even hint at it - quite apart from their connections to the interests of larger landholders (and general property ownership doesn't tie votes to these interests by accident either). The whole "buy a small place, move up continually over your life then sell off and downsize to fund your retirement" narrative has been dominant for long enough that saying "that's not how the story is going to go" is not going to end happily.

 

[kabbes]

Actually, I'd be delighted if prices fell 50%. I'd buy a place worth twice as much for the same mortgage.

 

[bi0boy]

Think of how many home owners there are and how unhappy they would be if any government acted deliberately to reduce the value of what is in most cases their most valuable asset.

Not going to happen.

There will only be a crash if there is a rapid reduction in population or rapid increase in house building. As the latter is not economically viable in the volumes required to reduce prices, anyone hoping for prices to drop massively so they can buy somewhere needs to wait for the Black Death MkII or maybe a more serious volcano dribing mass emigration to Australia?

 

[FridgeMagnet]

Actually, I'd be delighted if prices fell 50%. I'd buy a place worth twice as much for the same mortgage.

That is a somewhat atypical position to be in though.

 

[kabbes]

Sums Gis a clue.

Even though you have made paper money by buying the house, you'd be considerably better off for having rented.

 

[cesare]

Even though you have made paper money by buying the house, you'd be considerably better off for having rented.

Well, I hope that applies for the foreseeable, as I'm in the process of doing that atm.

 

[ymu]

This is nonsense. You're basically making it cheaper for first time buyers to buy somewhere than for upsizers. Under your system, you're better off not buying a place to live at all until you want to move to your final house. And woe-betide you for wanting to up sticks and move elsewhere in the country. Buying the same value house elsewhere? Tough shit! You're still going to be walloped for 90% of the value of wage rises in the time you've been living in your house even though you are moving to exactly the same house somewhere else!

The size of your mortgage does not go up with inflation.

Buy a house for £100k with a 10% deposit. You owe £90k. You still only owe £90k (minus any capital repayments) on it whatever happens to house prices or inflation. Rents go up with inflation, mortgages do not. If people can pocket massive amounts of free money to put as a deposit on their next house, and investors get in on the action, you get house price inflation running way way ahead of wage inflation and housing becomes unaffordable.

Housing is a necessity, not an investment vehicle.

 

[Idaho]

Even though you have made paper money by buying the house, you'd be considerably better off for having rented.

Except you are overlooking the fact that renting (from private landlords) in this country is a total pain in the arse. No security of rent levels, no security of tenancy. Moving house every 6 or 12 months, deposits, crap landlords not fixing stuff, etc.