Thursday, Feb 26, 2009
Down Down Deeper and Down
The Economist: Down Down Deeper and Down
Finally someone SPELLING IT OUT at 3 x's income house prices, that have inflated 190% in 10 years have to come down down down or wages have to go up up up. So why am I still reading that Mr Brown will Nationalise ALL the banks if they don't start lending 90% mortgages ? How does Mr Brown, who said at the weekend "no more 6x's income" think people can lend at 3 x's income with a 90% mortgage and anyone can afford anything? Will somebody PLEASE ASK HIM!! So PLEASE will he just say, "look sorry I should have capped mortgage lending at 3x's years ago, we are now all in a dreadful mess but doing anything right now to put more people into debt supporting a mortgage market none of us can afford IS NOT GOING TO WORK. We have to come to terms with what has happened and houses HAVE to drop 50%.
19 Comments
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1. 51ck-6-51x said...
Not sure it's as even as good as Buttonwood makes out.
The article is using the fall from Nationwide's recent report, but if the chart is correct then the average income is around 147746 / 4.2 = £35K. maybe that's the average income (single applicant, Or primary+0.5*secondary for a joint application) used in a successful mortgage application in some recent period?
According to the ONS, the average wage earned by a full time employee (i.e. discarding the unemployed and part time workers) was £479 per week gross, which is just shy of £25K (multiply this up by 1.4 to get to £35K). Hmm, any thoughts?
2. Eternal Sceptic said...
I think crash gordo is between a rock and a hard place. He is trying desperately to kickstart the housing market, yet the market ramped up on slack lending policies that cannot be allowed to continue. Something has to give and that would appear to be reduced prices and reduced lending exacerbating the problem he is trying to solve. Hoist with his own petard springs to mind as he presided over both the rise and fall. I suspect history will be most unkind to him.
3. quiet guy said...
'any thoughts?'
Well how about using regional median incomes instead of national averages for starters. I suspect that London wages skew the average wages much higher than is realistic elsewhere. Just out of interest, I sometimes have a look at job offerings in adertised in agency windows in the South West and Midlands. Very rarely do I see a 35K or higher job.
4. 51ck-6-51x said...
quiet guy - Thanks, yes regional analysis will be more meaningful, but the house price is averaged as well as the wage. I think the graph must be using mortgage application data, looks about right. I work in London and know people who commute from afar (including one from the Leicestershire countryside) I also used to know of someone who commuted from Newcastle.
5. Nowisthetime said...
House prices wont drop 50 % ! Rental yields are starting to add up again now with low interest rates and the opportunity to buy house at 30 % under 2007 prices. Im my opinion we are looking at a 35 % drop max. I know a lot of investors that would jump in again if house prices get anywhere 35-40 % off peak. This will hold the prices at a level no lower than 35 %
6. This comment has been removed as it was found to be in breach of our Blog Policies.
7. voiceofreason said...
Well said Kathryn.
I too find it sooo frustrating.
The govt seems to want to bail out all the reckless borrowers at the expense of those who save then buy.
Dunno what the strategy is now for us prudent folks.
8. titaniccaptain said...
Nice one Kathryn
9. happyrenter said...
@ Nowisthetime(for VIs to desperately ramp)
I know a lot of investors that jumped in when dotcom shares were 35-40% off peak, and others that jumped in when bank shares did likewise - turns out those speculative bubbles burst too
I'd move abroad before buying at anything more than 50% of 2007 peak (I don't think I'd be the only one)
10. titaniccaptain said...
@Nowisthetime
So what happens when interest rates go back up? and what happens if they REALLY go up?
11. str 2007 said...
So what did Kathryn say that's been removed ?
12. britishblue said...
Long term interest rates are 5.5%.
The current interest rates are the lowest for 400 years and therefore artificially low. They are low to kick start the economy and ward of 'deflation'. As soon as we see the 'green shoots of recovery,' the issues will very quickly move to inflation rather than deflation. Inflation will need to be controlled by higher interest rates. Therefore at some time in the next three years we could start seeing interest rates climb above the 5% mark. Using the current interest rate as a reason to buy a house is as stupid as using a low start mortgage rate as a reason to buy a house. A couple of years worth of low interest rates mean nothing over a 25 year period.
13. inbreda said...
1) what did kathryn say, that has been removed, that everyone is applauding (moderator go to bed!)
2) @5 nowisthetime - rents are falling - so your arguments simply doesn't stack up.
14. techieman said...
nowisnotthetime - yes you mayhave a point. 2 things - 1. new people (or thiose that effectively shorted looking to get back in) will be sucked in to a DCB and 2. Are existing BTLs with more than a couple of properties (if geared) really going to be allowed to average ?
15. Rjw8652 said...
Nowisthetime - where is the evidence that rents are recovering? My experience in South Manchester is that they are falling rapidly. We rented for 1600/month last July and a similar house in similar area now is asking 1250/month. I've also read numerous reports in the press of falling rents elsehwre. So, where's your evidence?
16. str 2007 said...
The problem I see is that with interest down at next to nothing we are in the same place USA was in 2001 whn a huge amount of people took out loans they couldn't afford.
I accept lending criteria is tougher here than USA and now even more so. But I can't help sensing they are going to create the same problem all over again.
My point yesterday about making every town and village in the country have 'at any given time' 5-10 sensible building plots available at a max price of £30k per 1/4 acre would be a cheaper and better way to kick start things.
At least then when money is spent it would generate movement in the economy by having a house built rather than simply transfering wealth around.
It would also have the effect of bringing existing houses down to a sensible price level, at which point the demand for new plots would diminish as it wouldn't be any cheaper to build your own. You'd just have the benefit of maybe the design and layout you wanted but have to wait a year for it while it was built.
This idea would keep fresh money flowing through the banks and directly into he economy (rather than relying on someone mewing to get it to the economy.
It would also help the government hit its housing target.
The money leant against these projects would also be safe as the finished project would likely be worth a little more than the capital invested.
Everyones a winner. (Well us lot and all the architects and builders anyway.)
17. voiceofreason said...
britishblue @ 12: yup, I tried explaining this to an EA. He kept saying, but payments are low NOW. Doh !
str @ 15. Like it. Is there a way to stop the landowners suing for loss incurred by being forced to sell plots of their land cheaply ?
I would like to know what was removed @6 to...
18. Liddiard said...
Felt I ought to say, that as far as I know I have not said anything that was removed. I did try to add to the Blog yesterday an article that said the FSA are fed up with Gordon Brown and are going to bring in legislation that makes a 15% deposit the minimum, which is quite a move in the week Gordon Brown is forcing lenders to give 90% mortgages, but I don't think the article was put in the blog for some reason. They don't always make it do they, quite a few of mine haven't, not sure why because I like to catch up on all the news in the one place, on daughters computer (no home at the moment) and I only get a short burst of computer time. A few people said yesterday in their comments that they will miss this website, meaning the house price crash is here and I can't see us all getting together on the new House Price Boom website (heaven help us let's hope not). It would be good to see life just go back to normal,if the FSA would ensure 3x's income not just during recession years , can't see wages going up much in the next decade........if we just STOP seeing houses as something to make profit we could all benefit enormously. I was lying in bed last night thinking about Anthea Turner's two x 5 million pound properties she is having to sell, and wondering how much they would have been worth 10 years ago? As I have said a few times recently, a £250000 property a short while ago was referred to as being worth a quarter of a million. One of the Sunday papers about 15 years ago did a survey about how much money people would like, and a huge percentage said that if they won the Readers Digest comp £250000 they would be happy and retire, YES THAT IS THOUSAND POUNDS not millions . (Interest rates were good in those days and a nice family 3 bed home under £90000), but its hard to imagine we could retire on £250000, and can ANYONE say we are better off now?
I read on these blogs people saying house prices are going to boom again, investors will snap up homes if they fall 30% pushing prices up etc., but I feel life is more likely to return to where we have been for a great many years prior to homes being allowed to inflate 190% in 10 years. We are creatures of habit if we are allowed to be, and the current BOOM habit is very young, I sense we are all already thinking again about what really has value that is sustainable, and I feel what is emerging is a bottom up economy that will tie the top in with the bottom in a way that serves us all, starting with getting rid of £650000 a year pensions for people that make their banks billions in losses. But you can't blame these poor creatures of BOOM either can you, they were only doing what they thought was right at the time. I am just a simple housewife going through some bad times what do I know about anything.
19. str 2007 said...
voiceofreason
Without planning permission the land is worth far less than this. So the land owners gain - just not as much as they would have a few years ago. But then planning permission wasn't granted a few years ago.
The way I see it is this countries problems are hinged around housing and the fact it's so expensive.
We need to sort that problem now and quickly.
The above solution allows for keeping interest rates low and the over indebted in their houses whilst allowing the next generation to move forward.
Whilst at the same time making sure the money put into housing fom the 'new lending spree' goes into the economy, not just over priced houses never to be seen again.
The sooner we get the problem rectified the sooner we 'as a country' can get on with rebuilding our economy.