The bankers have enslaved us with their high house prices

[CassandraW]

We have just bought my parents house and I?ve been thinking about the differences in our circumstances compared to when they bought it.
Their quality of life was far superior to ours. Mum chose not to work and stayed at home to care for my four sisters and I.
I do not have that choice even though this is our second house like it was for my parents.
My hubby earns more than dad in comparison to the average wage so we should be well off but I have to work because the mortgage is so large.

It seems to me that I am a slave to a bank, while mum enjoyed a much better life.

When New Labour abolished financial regulation by creating the FSA our banks deliberately lent too much money to too many people. They did this to increase house prices.
In 1997 the average house cost only £60,000 but now it costs £160,000. The long term average mortgage rate is 6%. On a 25 year mortgage for every £1 borrowed 92p has to be paid in interest.
The more interest then the more money banks make and the more money they make the more they pay themselves in bonuses. On a £60k house someone had to pay £55k in interest but on a £160k house, the interest is £147k. That means the housing bubble makes bankers an extra £92k in profits on an average house. Just imagine how much extra they are making from all the higher mortgages on all the house sales since they engineered the boom. Even though the base rate is 0.5% banks have not lowered their mortgage rates enough but are making even more profit because they pay savers much less, so their margin is better.

People might think ?yes but look how much money your parents have made?. Here?s the rub. Although it looks like a lot of money ? what it buys is much less compared to what it would have bought before the housing boom. The credit expansion banks used to force house prices up, has created too much inflation. This inflation has eroded the purchasing power of my parents so called ?profit?. They would be no worse off if house prices hadn?t risen so much because although their cash pile would be less, it would buy more.

So the future I face is paying banks a much larger mortgage so they can make their bonuses and spend our money now while it is still worth something. However to do that we both have to work every hour god sends to live in the same house as my parents. It?s not a better house, we just have much more debt to service to buy it. We need the house to double in price just to cover our interest costs. If it goes higher it will just result in higher inflation which will mean any ?profit? will buy less in the future.

The bankers have conned us by allowing joint income mortgages. People have borrowed more which is giving banks more profits. If you look at 3 times main salary plus 1 times second salary, house prices are far too expensive. Though that is what my parents borrowed to by the same house as us. People should refuse to borrow any more than that and wait until house prices decrease, otherwise they are forcing their children into the same life of drudgery, when it?s their time to buy. I would much prefer to work part time and spend more time with the children but in effect I am working all these extra hours just so my bank makes more money.

I mean, just look at the OP. What part of borrowing with interest is so hard to understand? That's how it works! Slating banks for loaning with interest because having to pay the money back will mean she doesn't get as much 'profit' from the home. She'd 'much prefer to work part time and spend more time with the children but in effect I am working all these extra hours just so my bank makes more money.'

Um, if you wanted to work part-time, then don't buy the house.

And well, when you borrow from a bank they charge you interest. That's how they make money. It's a business. Don't like it, don't borrow money.

Allied to the 'I work hard, I deserve...' mentality is the one where everybody else is to blame when it all goes wrong. 'It's the government/banks fault I can't pay the mortgage - nothing to do with them making bad choices or, lets be honest, their greed. People are constantly pushing for a little bit more all the time and when the banks provide the products and lend more, the individuals throw common sense and caution out of the window and take on loans they can't afford because they aren't prepared to wait.

The banks do have some responsibility only in so far as they make the money available. They are a business, they aren't there to be your moral arbitor of what is right, nor to teach you how to manage your own money. They are there to make a profit like any other business selling any other product although for some reason banks are supposed to have more responsibility than any other business for reasons I don't understand. Their fault lies in them being less risk adverse and lending to people who weren't a good bet to pay it back. This was particularly the case in the US were they lent more to the sub-prime market. I think in the UK there is still a bit of common sense floating about, probably as a result of the last recession in the late 80's early 90's where repossessions were horrendous. That doesn't seem to have been the case this time. They are a lot lower, presumably because interest rates have been kept under control. The Bank of England has managed to 'protect' the consumer that much at least. Unfortunately as somebody said earlier, the US banking system being in turmoil has had a global knock on effect.

I reckon really that the situation is too complex to apportion blame to any one cause and blaming the banks for all the woes we have is really much too simplistic.

Interest is variable however, and under controls other than in the hands of the borrower. Many people only look to the next five year fix to measure affordability and to feel comfortable with their decision.
And there used to be regulation and guidance for mortgage lenders as to the sensible framework for lending, but the banks pressed for the opportunity to exert greater, shall we say 'initiative' regarding flexibility of mortgage lending which threw us into very different territory to what went before.

To be fair on the OP - and she does make some very valid points - I think she was focusing on the differences in choices between her & her family and the situation of her parents when they had a young family. The fact is that if you want to be able to provide any sort of quality living space for your family, these days both parents working is a necessity more often than being a choice - and that goes for mortgage or renting.

I don't know how old the OP is but a lot of borrowers probably don't remember the horrendous interests rates 20 years ago. We have become used to low interest rates but if you had any common sense you wouldn't rely on rates being so low all the time.

We don't have a fixed rate mortgage, it is a tracker. We had to consider that rates might go up and we have to weigh up our own risk about whether or not we can afford to pay. I reckon a lot of people have forgotten to do that. They think that in their current situation they can afford it and then don't look at the wider picture of what might happen if rates change or their circumstances. We can't manage all the risk but we can make sure that we don't leave ourselves too wide open and people don't seem to do that any mor because it gets in the way of what they want.

It seems to me that most of the current economic crisis stems directly from the sub-prime lending crisis in the USA (and probably deregulation of US mortgage lending for a decade before that); it's happened in a different economic system. A lot of the details said on this thread apply to the British situation but weren't the same to how it worked in the USA.

Ultimately British banks over-invested in an instrument (bundles of foreign sub-prime mortgages) that they didn't properly understand and consequently dreadfully over-valued. It didn't really benefit them to get it so wrong, although I agree they should have taken much bigger hits for their mistakes. Talking about the UK mortgage lending practices in recent history is only loosely relevant to understanding today's economic crisis. imho, the greediest people in this story were those who initially did all that sub-prime lending in the USA, and most of their dodgy loans were sold off 5-10 yrs ago. Most of these don't-give-a-fudge-about-the-long-term lenders were NOT bankers in any usual sense of the word, btw, any scheister and his money could set up as a mortgage lender in the USA for a while. Their equivalent of the FSA has almost no teeth at all.

My cousins sell mortgages in the USA btw, real eye-openers talking to them! All the amount that can be lended criteria, rates you can get, tax relief, etc. is a very very complicated & different system from the UK.

I think the average family has a considerably lower standard of living in terms of housing than in my parents' day.

This is partly because whilst the population and demand for houses has grown no amount of new land has not been made available for housing due to planning restrictions. The planning policy is for smaller and denser housing which is not what most folk actually want to live in. If more "greenfield" land were released for housing then house prices would fall. Governments deliberately and artificially shore up house prices for the "feel good factor" because home owners tend to feel good when they think their house is worth a lot/ more than they paid for it.

Clothing and foreign travel are now very cheap compared to when I was a child, and of course there is more digital entertainment. Petrol and gas/electric are much more expensive though.

So what my parents thought of (and still think of) as "luxuries" are cheap, whilst the "basics" of housing and fuel are expensive.

My own view is that overall we work longer and harder now than our parents' generation did for substantially less reward.

Yes, our parents had it easier - perhaps. Again, too bad. Those times are past, it's a waste of energy to moan about it now.

My own father, born during The Great Depression to a poor family, bought under what he could afford at the time and never 'traded up' even when times were good. He was always of the belief that the rug could be pulled out from under him, due to his upbringing, considered himself lucky, and cut his cloth accordingly.

'Interest is variable however, and under controls other than in the hands of the borrower. '

Then you have two choices: either pay more interest at the outset to lock in the interest rate for the duration of the mortgage, in other words a capital and interest repayment mortage for 15-25 years (and these products have always been available, just that they were at a higher rate of interest so that meant you could buy less house), or don't borrow with interest at all.

That's always been the case. Banks charge interest. Interest can vary. Duh. They're in the business of loaning money with interest (among other things), the same way other businesses sell car parts, paint, or charge for a service.

I agree with Ragged. The S.E.C (the equivalent of the FSA) are utterly useless. These are the same people who received dossier after dossier that Bernie Maddof was a crook and did bugger all about it. He had to actually tell them he was a crook before they acted. Ultimately they didn't do their jobs properly by allowing any Tom, Dick and Harry to be a mortgage advisor, then allowing retail banks to offload the loans to their investment banks then allowing those banks to sell them on. Also the US accounting rules were so lax that it allowed the banks to carry these "assets" in their books at huge profit when they didn't have a scooby what they were or what they were worth.

The 3 main parties have been crap at explaining to taxpayers what's going on and why we are having this economic crisis. Labour, rightly said it was a global recession but didn't explain why. The Tories blamed the bankers but didn't explain to the public that there is a world of difference between your high street (retail) banker and investment bakers. The LDs through Vince Cable have come up with the right solution ie separate investment and retail banking without explaining why that's necessary. As a result, Joe Public just thinks its the bankers.

On the UK banking system, I think there should be a simple document that everyone has to read and sign before they take out a loan which illustrates what the repayments will be at current, 5, 10 and 15 interest rates so people understand that if interest rates are 10% and you can't afford your loan then you have got too much risk.

I grew up during the eighties when interest rates were high, and both my parents had to go out to work to pay the mortgage - that was considered totally normal. all my friends' mothers worked as well. I still remember the first time I met someone who's mother didn't work, as this seemed to me the most incredible sign of wealth. and I was considered the wealthy one in my school, because both my parents were teachers instead of working in the chocolate factory. it's a very different story to the OP's memories of a SAHM on a steelworkers wage.

I suspect that, just as now, different families had it very different when we were growing up.

the question that comes in to my head about house purchases is
are you buying the house you can afford or the house you think you should
have
one of our employees has just bought a 5 bed detached/3 bath/double garage place and are bemoaning that fact that they are going to be strapped for ever - of course they are, I know their income, yet they feel it is what they 'should have'
now this house is lovely, but they have 1 child (and plan no more) and struggle to furnish the place - SO WHY BUY IT
and before other posters say i am jealous I am not , i have been there, done that with the larged detached property in an acre/ big expensive cars/ nannies and gardeners - then i saw the light and stopped being a slave to work and keeping up appearances and live in a very nice, affordable property in a good area - no mortgage - etc
yet i am constantly being asked why i don't live in a 'big house' anymore
and mortgage interest rates being low at the moment could be the catalyst for disaster if we ever go back to 1980's rates - remember when they went up daily and moved from 10% to 14% within weeks
it is due to the way we seem to think we are 'entitled' that is a problem

mollymole everyone who comes to our house asks the same question : 'How do you cope with only one bathroom/toilet?'. . The word coping has lost its meaning.

Cant people hold their pee for 3 minutes?

We have one bathroom for 5 of us. We're still alive! No debts to worry about and able to save up so that, when DH and I get too old to work, we'll be able to buy a one-bed flat or the like in a certain rural area outright.

I think that is the problem Mollymole - people have forgotten about the last recession.

As I said earlier, I remember the high interest rates back in the late 80's/early 90's. I bought my first flat in 1992 during the recession and was very aware how high rates could go and it certainly made sure that I didn't borrow more than I could afford. They were actually 10% when I was buying which is very high compared to our current standards which haven't been above 5.5% for about the last 10 yrs. However, it was reasonable compared to the most of 1980's when rates never went below 10% at all. It certainly focusses the mind when you are deciding how much you can afford.

So I think it is a generational thing. If you haven't lived through the horrors of that kind of recession with high and unstable interest rates, you can't imagine what it is like and it is easy to think it won't happen to you. For a lot of people younger than, say, their mid 30's, rates like that are ancient history. I suspect that in part is behind their willingness to borrow too much. It is however, incrediably short sighted - a lot can happen over 25 years. Rates could certainly rocket again over the course of their mortgage term.

And of course credit card companies still think they are in 1987 the rates they charge. Credit cards are not a good way to borrow but it doesn't stop people getting multiple cards and using them just because they are available. Again, nobody makes them but they do it anyway.

When we bought our first flat in 1990, we were told to estimate paying interest at 10% and warned that it could go up from there. Remember Black Wednesday under Major when interest rates went up what feels like a dozen times that day? Can't remember the exact number but it was ludicrous, every time you turned on the radio they'd gone up again. By tea-time I'd given up worrying about it it was so ludicrous.

Ah, they did raise interests rates on Black Wednesday, then. I thought they did Edam. I looked it up on Wiki and all it talked about was being kicked out of the ERM. Nothing about interests rates. I thought they went up. I remember DH (although we weren't married then) kept phoning me up to tell me the rates had gone up. Thankfully I had fixed my mortgage so I wasn't affected but it was a scary day for lots of people. It leaves a mark you don't easily forget.

It was scary, but it stopped being scary towards the end because it was just so ridiculous. I remember thinking 'they can't repossess every single house in the country so someone's going to have to sort this shit out'. And then the government gave in and took us out of the ERM, thankfully.

Still, my generation got screwed over endowments, so it's swings and roundabouts...

As I remember they went down quite quickly, didn't they? (Can't believe it was nearly 20 years ago). I was lucky enough not to have an endowment but got screwed on a pension mortgage instead. DH did get screwed on endowments though!

Its an interesting discussion because I was in my late teens in that recession yet because of the impact on my family, I am totally risk averse and totally petrified when it comes to debt. I think its important for all of us parents to pass on those lessons or what we saw/heard (eg someone was mentioning earlier father being born in the Great Depression) so the next generation doesn't go on to make the same or worse financial mistakes.

lachesis,
I know how interest works thanks. It's the amount of it that bothers me.

What I'm saying is that people think THEY are making the money when house prices rise but they aren't. It's the banks who make more profit because people have more debt to service.

Say you sell a house at £150k that cost you £100k it looks like £50k or 50% profit. If the next one you are buying is £240k you have a £90k gap to upsize.
If house prices hadn't gone up 50% the £240k would be £160k and the gap form £100k would be £60k. Therefore people haven't made 50% profit they just have 50% more debt to service, a £90k gap (240-150) instead of a £60k gap (160-100).

When you sell the £240k house even if it's gone up in price the value of the money you will get is reduced by the resulting inflation caused by the credit expansion that pushed house prices up.

People like us are working more hours to service a larger debt that doesn't make us any better off. Only the banks are better off which is why mine tried to get me to borrow more and why house prices are where they are now.

The housing bubble was intentional and banks are desperate to keep it going.

Last year 900,000 houses were sold with a mortgage. At £60k per house that's £54bn but at £160k that's £160bn. That's an extra £106bn debt to service when the long term average interest is 92p on the pound so £98bn extra profit for banks over the term of those mortgages.

Higher house prices
.
.
.
.
Larger mortgages/more mortgage interest
.
.
.
.
People work more hours
.
.
.
.
Banks make more profit, bankers make more bonuses

I can see the dots.

I got the maths wrong on that last post because I was originally going to do 1m houses not 900,000.

The end part should be £144bn where it says £160bn so it's £90bn extra debt to service at 92p is £83bn extra profit.

'What I'm saying is that people think THEY are making the money when house prices rise but they aren't. It's the banks who make more profit because people have more debt to service.'

The banks make profit on what you chose to borrow, Cassandra, regardless of your own goals for profit. They are in the business of loaning money for interest, among other things.

You see a house's value in terms of its sale value, not for what it is: the essential that is shelter, on par with food and adequate warmth.

People who thus use houses as investment vehicles are playing a game that is spelled out very simply in any investment vehicle: the investment may go up or down in value.

They choose to accept this risk. The information is very easily obtainable to anyone who can read.

If they choose to assume such a risk, and put their neck on the block by overstretching themselves to purchase a home, or compromise their financial life by then having to work every hour possible to service the debt they took on, then that is their lookout, not the lender who fronted them the money.

Caveat emptor.

Agree with Cassandra on the illusion of wealth the house price inflation has created - unless you can sell up and cash in. Think a lot of people also see through the facade these days, hence the state of the market - at least where I am. People now refusing to pay the prices being asked at this stage in the game (as well as in some cases borrowing not being forthcoming), and the situation about to get worse as a new crisis looms.

Should mean lachesis & I will be able to more easily afford that second loo

i love this idea that banks conspired to raise house prices. How about looking at the insane British mentality that houses are the best investment going and should serve as piggy banks and pensions? How many times in the past 10 years have I heard that prices can only go up and that renting is dead money? How many property programs encouraged this mentality? How many people have tried to cash in on property development and become landlords?

Banks may have benefitted from the situation but I think it's a stretch to suggest it was their creation. If they had that power, they'd also control stock, bond and currency markets. Those markets are rational, though, and not subject to the ridiculous dreams of an entire population.

Cassandra when you say People like us are working more hours to service a larger debt that doesn't make us any better off. I just think, don't get into debt if you can't afford it then you won't have to work like a loon to service it. Seriously, it's not rocket science and there is no law that says anyone has to own property and be mortgaged up to the hilt.