Social consequences of house price boom

[Upwind]

comment at the guardian.co.uk [click]

One of my pet subjects but I have not seen this in the mainstream media before:

"If food or energy prices were rising at 8% per year, let alone at 20% there would be outrage. There would certainly be alarm that such price rises were not sustainable and that increasing numbers of people were unable to afford a basic commodity.
Academics at the university of Aberdeen are currently running a project on this, and other, changes in society and believe that "when the implications of these developments are taken together, they hold the potential to produce profound and, as yet, largely unanticipated social consequences for this age cohort, as well as for UK society as a whole".
Astronomical prices mean that couples who cannot afford to buy, or move to larger properties, or lose half a joint income, are having children later in life when their fertility rates are lower. You do not have to own a home before you have children but many people desire at least some stability before they do so. "

"Kevlar have you been reading too much hpc.co.uk "

No, if I had, I would have developed an unnatural lust for Oswald Mosely and a hatred of humanity. Last I looked at HPC it was stuffed with misanthropes and turning into a BNP recruitment centre.

Anyhoo, I looked at the newspapers in Tesco today. Telegraph Headline: "Property market 'heading for a fall in 2008'"

First paragraphs: "The housing market is heading for a fall next year, experts have warned, after it emerged that property is at its most overvalued level in more than 15 years."

"Soaring prices are putting properties out of reach for many, with unaffordability reaching the worst level since the end of the last major crash, according to figures produced for The Daily Telegraph."

Sometimes it's nice to be wrong.

but it's not a new headline and there are people lamenting the fact that they have been waiting for that fall

here's another headline and story on the topic

I'm not commenting on it being a new story; It's the fact it's front page news in a serious broadsheet, rather than a byline story on the BBC website.

That and I was trying to pre-empt anyone pointing this out after my previous 'the down-sides of house prices increases do not get adequate coverage in the mainstream media' post.

or alternatively

they are sustainable

economics is such a controversial topic i sometimes wonder how it is valid at all

But its not worth arguing when it is going to happen, it should have happened in 2003. It didn't. That is not to say it won't happen. It will, it has to because it has gone on for far too long to not crash. If prices hadn't gone up from 2003/04 we could have seen stability, but its too late now. They are too farout of kilter with the economy itself to sustain.

they may fall but IMO will inevitably rise again in the long-term. A shortage of supply in the UK will always deliver this result. Apparently on average house prices have risen by 2.5% every year over the last 50 years (even allowing for slump of 1990s and earlier downward cycles).

The whole situation is absolutely bonkers - I just cannot believe what people are prepared to pay in the UK now. I wonder how many people now buying a property are doing anything more than repaying the interest alone? It is a naked call on the housing market and no more. If you only repay the interest, you are effectively renting from the bank and assuming that the market keeps going up, because you can never repay the prinicple - not unless rates fall - and what's the chance of that?

the MPC may raise rates on Thursday by 0.25%, but more likely that they will wait till May when they get the inflation data for the first three months of the year. The view at present is that rates go to 6% before the end of the year, but will this trigger a crash?

The big problem is that everyone has to live somewhere and there isn't enough decent rental property around.....so they stretch to buy. the banks are now offering 10 year fixed rate morgtages and further expanding the multimple they will lend...that will mean it's easier for people not to default and until you get mortgage default levels rising, the market ain't going to fall.

It will come, but it could still be some time off. Unfortunately when it does come, alot of people who thought tha thei house was their pension, will be really caught between a rock and a hard place.

yes, but if you're doing interest-only (as we are) you're able to afford a better house than otherwise and banking (with v good odds) on the house being worth much morein 25 yrs time when the repayment is due. As I said before, considering that there's historically been a 2.5% increase each yr, it's still a worthwhile long-term investment.

RTTH. I totally agree with you on this, IF you are buying the house that you want to live in for the next 25 years. For a first time buyer (usually the type of people to take out these mortgages, I am generalising here I know), they are gambling big time at the moment. If they meet a partner and want to sell that small flat to buy a house then they have to pray that it's going to be worth more than the purchase price. Which at this time nobody could possibly guess.

Makes me think I should have gone for one of these as I intend to stay here forever

Sorry, didn't explain myself, as a 25 year investment, I would say go for it.

There is a glut of rental properties where I am from, so many BTLers, who are desperate for their 'investment' to be filled, are keeping the rent market subdued. I can rent a nice place for half what the mortgage will be, so I do that instead and save my extra money until the Stock Market takes a tumble, then plough my money there, it on average goes up 10% pa.

Bunsen, I agree with you too. I am being incredibly agreeable tonight

well can I agree too?! Yes, BTLers can suppress the rental market -has happened where ours is but we still get a very good rental yield and it's those people waiting for the sales market to collapse who make perfect tenants, so thank you!

Seriously, bunsen,I take yr point about the stock market seeing an average 10% increase yr on yr (though over what time period is this??) but there are sunk costs in a house - stamp duty/legal etc which can never be recouped, ours total around £30k so if we were to sell our BTL to invest elsewhere we would never get that back. I read somewhere that around 50% of BTLers are "accidental" landlords such as myself rather than moneygrabbers with a whole property portfolio as often portrayed in the media.

HMMMM

Much as i hate to poor cold water on everyone's rosy prognosis

If you buy a house for 200k and have an interest only mortgage and the property market goes up by 2.5% every year your property will in 25 years be worth 361k according to the principles of compound interest. During that time you will have paid a whopping 275k in interest assuming a 5.5% mortgage rate. Your "profit" is 161k, but it has cost you 275k in interest to make and you still don't "own" the house as you have not repaid any of the principle. You also have to sell to realise your cash....in 25 years all the other interest only people will be doing exactly the same to finance their retirement too. Cue more supply than demand....also demographically there are more of us than there is of the next generation so who are we going to sell it all to?

Even worse - let's assume that the market corrects by 25% in the next 2 years, and then goes back to an average 2.5% p.a rise thereafter. SO your house is worth 271k at the end of 25 years and over that period you have paid 275k in interest to the bank.

OK - so i know we all have to live somewhere, and either pay rent or pay the bank interest, but you could have rented and paid for the sake of assumption 600 a month (OK, i know in many parts of the country that will get you nothing decent, but this is a theoretical exercise) which in total would have been 180k in rent paid over 25 years. If you invested the remainder every month (that you would have had to pay on your 200k interest only mortgage) of 316 into the stock market assuming a long term 6.5% return per annum (which is relatively conservative) you would have 265k CASH! at the end of the period....

The sums don't stack up.....

oops - sorry typo - you would have 238k under the rental scenario at the end of 25 years if you assumed it was invested in the stock market.......h

hit the wrong key but still doesn't change the story

yes, I see your point. But I think few people on interest only mortgages seriously plan to remain on that basis for the full duration of the term- we certainly plan to be making overpayments to reduce the capital sum and the interest payable.

The interest only mortgage is usually temporary but good calculation, thanks. Sometimes the interest is less than rent would be and you have the security and the psychological advantages of owning your own place. Also sometimes house prices don't go up at all but sometimes they go up a lot so over 40 years of being in the housing market most people have always made a reasonable tax free sum which they don't make with renting.

Heard someone say the other day that high property prices in London and the SE are sustaining poverty elsewhere - because people can't afford to move to where the jobs are. Interesting argument.

Possibly true although there is no shortage of Poles, Romanians and others in London happy to sleep 3 to a room and take the jobs there are. It's one reason in 1983 my husband's school had to offer staff flats just for teachers to be able to be attracted to working near London when they could get paid much the same in some leafy Norther area where house prices were a third of the price.

Does anyone know how many mortgages are interest only? I know a few people who do it but I think at the back of their mind is the knowledge that at some point they will inherit property from their parents and clear the debt that way.

I think some move to them on a temporary basis when things go wrong like a spouse dies or for an initial mortgage when they know later their income will rise but I don't know the percentages.

From the council of mortgage lenders ; in 2006, 24% of first time buyers* were interest only. 32% of home movers were interest only.

A minority of these have a specified repayment vehicle (40% and 25% respectively).

If so many people cannot cope with capital repayments now, how can they cope if interest rates return to the long term average of about 8%??

*which they define as anyone not transfering their mortgage

That's when you might get a crash and a temporary reduction in prices but it's hard to predict when that will be. As someone said below there is a glult of by the lets and rents are competitive in many areas.