Monday, Jun 11, 2007
Latest DCLG figures depressing news for FTBs
Firstrung: House prices rise by over 11% as first time buyers pay 17K more than in 2006
The latest house price survey from the government department (the DCLG) has revealed that first time buyers are now paying 11.2% more for a property than in 2006. This equates to approximately 17K, a huge increase for those on below average salaries. First time buyers actually paid 1.3% more for a property in April 2007 than in the previous month of March. The average price paid by first time buyers across the whole of the UK was £159,977...
Posted by converted lurker @ 11:01 AM (358 views) Add Comment
33 Comments
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1. paul said...
Yeah, but the shock hasn't kicked in for these figures yet. Wait for the April-May figures.
2. Alex228 said...
these who bougt now were the most intimidated "not to miss" the boat ones, they'll regret. I have a few such couples down the street
3. converted lurker said...
Have to be one helluva shock to stop the tanker to dead slow Paul. That 17K increase is close to the full wage of one FTB.
4. Scott said...
FTBs paying £150,000, FTBs now paying 17k more, where is this money coming from? I used to cheat at monopoly when I was a boy but this is real life. Perhaps everyone else is on the take except for me. My attractive solicitor neighbour is probably a hooker on nights. My hard-looking other neighbour is probably a contract killer on weekends. I just cannot explain it any other way.
5. inbreda said...
Agreed converted lurker. It will be onehelluva shock.
6. confused76 said...
What is the shock for Apr-May? sorry I am missing your point
7. paul said...
If I've been reading the situation correctly, the UK market more or less went from "steady going" to "dead stop" very recently.
8. confused76 said...
got you! thanks
9. harold said...
That's right, the "dead stop" figures will be out just in time for the July MPC meeting.
10. little professor said...
Crash postponed.... please try again later.....
11. This comment has been removed as it was found to be in breach of our Blog Policies.
12. converted lurker said...
Harold, nothing would surprise me in relation to just how important house price sentiment is to the majority of the masses and the political decision makers in the UK. When you consider that most commentators expected the market to tip when the 5% rate was reached in November then this market,( although out of control for some time), is proving incredibly resilient. A rate cut cannot be ruled out if the housing market goes into reverse, irrespective of the overall effect on inflation.
13. harold said...
CL, eventually the bubble will exhaust itself because people will be unable and unwilling to take on further debt. No amount to cheap credit will prevent the ultimate collapse of asset inflation into a deflationary spiral - just look at the US housing market.
14. This comment has been removed as it was found to be in breach of our Blog Policies.
15. confused76 said...
CL, the 5%+ interest rates have to migrate from the BoE base rate to the actual mortgages. So we should wait for the bulk of the 2year fixed periods taken in 2004/05 to expire (after this summer). At that point the IR rise will be felt. Even a lowering of BoE rate will not do much because long term rates will be on the rise anyhow.
16. maddison said...
If prices keep rising then debt will be easier to get. Just ask the banks, including the bank of Mom and Dad. Only very high interest rates or unemployment forcing house sales will cause a major correction. Yes some BTL's might exit the market but if prices keep rising....
17. mrmickey said...
Where I live in the west country there just do not appear to be that many houses coming up for sale and the ones that do sell in a short period. There does not appear at the moment to be anything pressurising people in to selling their houses.
18. inbreda said...
Maddison, I think you;re wrong.
To exaggerate the point. If someone earns 24k per year, and the bought their house for 150k, and that house increased in value to 1,000,000,000,000,000k, there would be lots of equity in it, but at the end of the day they only earn 2k per month. If they borrowed 1,000,000 quid the monthly repayment would be more than they earn. They would default immediately.
Rising prices has nothing to do with how easy it is to get debt.
19. confused76 said...
Folks,
... bit of a pointless discussion. There is much more credit distress in this country than the tip of the iceberg that MrMickey observes. There is a very serious number of families that are on the brink of financial collapse, in the S East, in the West and here in London. Unable to withdraw more equity or to extend the mortgage maturity (they are already on "interest only")
Forced sales are undavoidable at this point, and rising prices will not help or deter them... the issue starts from insolvency... if you are an optimist you have to bank on the following:
- increased employment rate (but we are at 100! now!!)
- booming salaries (what? they are not going up)
- huge bonuses forever (why do they call them bonuses? they are the flexible portion of your pay... eh? can go down? can they)
but again, asset prices shooting for the stars are not going to make any difference
20. confused76 said...
sorry continued...
... asset prices shooting for the stars are not going to make any difference if your equity in the asset decreases with time
21. maddison said...
So why do you think banks are offering higher multiples. Only because prices are rising and people have job security. There is no downside for them in this scenario. Prices are also rising as incomes of people who can afford houses are rising faster than those who cant. Lets not forget the proof is in the pudding. Every one seems to think what is happening is impossible or wouldn't happen but it is, so previous arguments about affordibility are clearly wrong.
22. Andy H said...
They are offering higher multiples because everyone else is and they are making a few £K up front in fees on each mortgage.
If prices are going up there is no problem if someone defaults. If they aren't then most banks will try and offload the riskier borrowers (can they sell the debt?)
23. confused76 said...
maddison,
in many cases banks have been able to sell their credit on to a host of intermediaries, IBs, hedge funds, etc, so they bear little risk.
other banks are carry-trading, and exploiting other sort of x-border things and making so much money on the UK mortgages, that even with 5% default they would be amply in the black (Santander's Abbey for instance)
what you will observe going forward - as pointed out in another posting of mine - credit will become more expensive IN PARTICULAR long tenure (so forget fixed rate mortgages - those will be for the rich ones!!)
"Prices are also rising as incomes of people who can afford houses are rising faster than those who cant" yes but not the number of these people ... otherwise you would see that in the average pay figures, wouldnt you?
"Every one seems to think what is happening is impossible or wouldn't happen but it is, so previous arguments about affordibility are clearly wrong." ... not so fast, Maddison. The percent of take home pay that is spent on mortgage has a hard limit of maybe 50% or 60%. At 50% the early 90's crisis started. Now we are still below 50% but we are getting there quite rapidly...
- house prices up
- mortgage rates up (after the summer is a big hit, see previous comment in this blog)
- more pressure from inflation of food, clothing and education
So maddison, the problem is just using the right measure of affordability... and be more open-minded in predicting the trends
24. tony marshall said...
Maddison "Every one seems to think what is happening is impossible or wouldn't happen but it is, so previous arguments about affordibility are clearly wrong."
This is the argument that goes "Bubbles defy economic theory, so economic theory must be wrong".. Clearly, bubbles are a fact of economics, but they defy logic, because they result from the fact that the market is not made up from logical people. Economic theory simply cannot factor in the sort of mass hysteria that brings about bubbles and keeps inflating them – but it can predict that they will burst, although not necessarily when.
With regard to the specific question of ‘affordability’, people have undoubtedly been paying their way by raising more debt to meet repayments and this will stop at some point. Many have also been quite legitimately paying their mortgages from earnings, but these earnings arise from other people’s borrowings (eg a builder building someone an extension, or a car dealer selling that new car) – these people will have difficulty paying their mortgages when the borrowers stop borrowing. This terrible credit fuelled spiral (perceived by fools and politicians to be an ‘economic miracle’) will eventually reach the top of it’s pendulum swing, then there will be only one way to go….
25. Pr said...
FTB's paying 17k more, or poorer FTB's not entering the market? One would expect the latter to occur towards the top of a cycle. Once the average FTB'r is paying 200 to 250k, then that will mean that anybody earning less than about 40-50k with 20-25k deposit is priced out. That should signal the end of the run and would be the result of another year of double digit rises in London. Everywhere else is just about saturated.
At 170k, people earning less than about 35k are priced out. What that means is, the average couple is just about able to buy a 1-bed flat at x5 salary, which Londoners are willing to do still. We could have a way to go yet. Once mortgage payments get to 50 or 60% of income and FTB's are fully priced out, then we shall have a slam dunk. Its just a pity that there is no will to stop these stupid bubbles happening in the first place.
26. maddison said...
When I wanted to raise more money against the house they wanted to see that my income covered my payments.... So MEW'ers must be earning more than they did in order to fund the borrowing criteria. I understand that as the LTV goes down you get more favourable rates but the rates are not that much better.
Also don't forget that if one house in a street of a 100 identical houses sold for £5k more than it did last year, then every house in the street is "worth" £5k more. But only that one buyer could actually pay the extra £5k. If 2 buyers paid £5k more for two houses then the same would happen. So one has to look at the circumstances of individual buyers or would be sellers to predict the course of the market. Not at average salaries, average debt per household etc. average this that an the other...
27. confused76 said...
Maddison,
I give you a few more options:
- MEW and extend the tenure of your mortgage from 25 years to infinity (interest only) and your salary can cover servicing
- In the US they invented the negative amortization loans... when will we have them here?
- there are companies you can sell part of your equity in your house, they buy at a discount of course but since they think of making cap gains they will charge a rent which is less than the mortgage rate
... there is no shortage of ideas when you are in deep debt desperation, and let us face it, it is a LAAARGEE number of people
28. dugmug said...
Article "This equates to approximately 17K, a huge increase for those on below average salaries."
Converted Lurker "That 17K increase is close to the full wage of one FTB."
According to the last figures I saw, the "average" FTB earns 35% more than the average wage. That's £32,000 if you take the UK median (for full-time workers), or £40,000 if you use the mean. So, Firstrung, please note that FTBs are not on "below average salaries", as people on low incomes cannot afford to be FTBs anymore. Which somes up where the market is, and where it's heading, very neatly.
What proportion of people earn 35% more than average? Between 25% and 30% of full-time workers. How many of these will be potential FTBs? I don't have figures for that, unfortunately, but I'd guess a lot of people on higher wages will be those well established in their careers, i.e. older people who already own a house. Doesn't leave many people to be FTBs then does it (which is why the proportion of FTBs is currently so low)! If prices continue rising, the "average" FTB will have to earn 40% more than the average wage, then 50%, then 60% - how many are left then? Perhaps BTL will fill the gap? But rents are rising at the same rate as pay is rising, so new BTL purchases will become equally less viable as prices continue to rise. Perhaps, as there will be no new purchasers, the market can be sustained purely by the people already in the market trading with each other? Cuckoo, cloud and land spring to mind. Continuing price rises ahead of wage inflation will eventually cause, at the very least, stagnation, even if every other factor remains benign. Pushing up interest rates or unemployment will help quicken things, but they'll get there on their own steam anyway.
29. bidin'matime said...
Confused - 'negative amortization loans' - I assume by this you mean one that increases because you pay less than the interest - I had one of those I took out in 1989 (Abbey National called it a ‘deferred interest mortgage’) – I’d MEW'ed, increased my mortgage to £140k (to buy a flash boat and a new car - I know, don't laugh..), then by the time I sold my house 6 years later the loan had increased to £157k.
With hindsight, that loan (or maybe it was the boat and the car) cost me very dearly indeed - so nervous was I of the size of the loan (and the fact that I’d made nothing on a house I’d bought in 1987 and spent thousands of hours on renovating over the years), that we downsized in 1995 by exactly one-third. Had we not done so, ie had we bought for the same price as we sold for in 1995, we’d have made around £150k extra profit from the subsequent boom…
Still, this story is illustrative of how someone (me in this instance..) can go from being extremely bullish about property, confident of their ability to borrow and spend (and repay..), to being very cautious indeed – to all those people who say that, once prices start to plummet, people will buy more property, not less, I am happy to tell them from personal experience that it just aint so. Of course, those who don’t get burned in the collapse might come in with guns blazing (as I hope to one day, this time round), but the vast majority will get burned and will crawl away and lick their wounds.
30. confused76 said...
BM
sorry to hear your story
yep, that is exactly like -ve amortization in the US
with parents mewing to buy flats for their kids, families supporting themselves from the house equity, and btl's expanding their portfolios 10 fold in two years. That s not earned money, it is broad money. It is the stupid investment of the Japanese housewife that found its way into the flashy Notting Hill two bedroom cum Range Rover.
i think the excesses this time around are far greater scale and the consequences will be much worse, since people will go into negative equity not for 20 or 30 thousand ££, but 100's thousands pounds. It is really a different scale of things
31. paul said...
Confused, I'm not stalking you. Honestly.
What have Japanese housewives got to do with this? Are you talking about the carry trade? If so, don't blame the Japanese public - they were as passsive in the zero interest rates fiasco as we were. You have Japanese banks to blame for that, with dodgy loans and poorly secured assets.
They were poorly secured because the assets were based on - you guessed it - property (well land actually but that's a technicality which bears little relevance here).
Japanese Uncle, (if you're there) is there any reason to think that Japan's situation is fundamentally different to the UK's?
32. confused76 said...
Paul,
I am not blaming Japanese households at all, sorry I did not mean that.
The main difference between Japan,S Korea, Singapore etc. and the UK/US is that in the former countries households have net savings, we have £1.7tn debt. Since their interest rates are 0% they have to invest in foreign assets... stocks and bonds. Some of money they have in fixed income has been funnelled into the UK property market, and that is how the banks are able to offer mortgage rates below the BoE base rate. So, in my example, the Japanese housewife owns a house in Notting Hill plus a Range Rover, but she does not know that
33. paul said...
Oh, I see. They own it in a figurative sense! Very clever. Yes, I can see that. Of course the Saudis probably own a fair chunk too.
The proportion of Japanese people owning property in the UK is minimal of course. They've already had their fingers burned by property. In fact i know a 40 year old Japanese IT director who is waiting to buy like us!
Commercial property is another matter though. Japanese construction companies own most of the City of London, along with the Saudis. Next time you go to see the Millenium Eye, look at the small brass plaque to the left of the ticket hall entrance. It meekly proclaims that the whole south riverbank including the GLC building is owned by an obscure Japanese property development company.