Saturday, May 16, 2009
Oh really? Thanks for letting us know
Independent: The property bubble has finally burst
Hundreds of thousands of people have discovered they were hoodwinked into paying well over the odds for their property. 24 year olf Kiz bought a house with her boyfriend four years ago. Now it's worth just £125,000, and the couple can not afford to move to a bigger property to start a family.
She's one of the many victims trapped because of the current situation.
Until property prices recover, there's little to be done to help Kiz and the other estimated 900,000 negative equity victims, but new controls could be brought in to ensure that the situation doesn't arise again. Mandatory deposits of at least 5% and a limit to 3.5x joint incomes would avoid another mad mortgage market.
Posted by little professor @ 12:26 AM (1318 views) Add Comment
20 Comments
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1. crunchy said...
I remember J. Major saying he would never let a housing bubble inflate again, and T. Blair and B. Brown and the next one.
Untill I see effective measures brought into place I will still believe that politics is a career move not a conviction.
Did I say conviction?
2. drewster said...
Mandatory deposits of at least 5% and a limit to 3.5x joint incomes
I think the limit on income multiples is a bit unfair on self-employed or people with seasonal income variations. I'd scrap income multiples but instead require a 20% deposit. After all if you've saved for long enough to have a 20% deposit, you must have a reasonable source of money. The higher deposit requirement also protects the bank better, thereby keeping the whole financial system on a more sound footing.
3. bleakhouse said...
At the moment saving for a deposit comes with a sort of bogof bonus, the amount you save each month will be matched in multiples as house prices continue to fall.
The hard part is selling, as the number of sales is down something like 70pct year on year. And I think there is lots of pent up demand, only its not from buyers. Sellers are trapped, by lack of buyers, and buyers are trapped by lack of deposits.
4. drewster said...
@bleakhouse,
I agree about the bogof bonus. However I disagree on the notion of pent-up demand. There's a lot of pent-up demand for a Ferrari that costs £10,000.
Demand isn't just about "I want", it's about "I can afford". Existing amateur landlords can't afford more houses because they are in negative equity on their current portfolio. Aspiring amateur landlords can't get a BTL mortgage, and they can no longer release equity from their principal home either. FTBs who until recently could buy with no deposit now find they can't afford the deposit. Wealthy foreign investors are too few in number to move the market. House-movers can't afford to step up the ladder because nobody can afford their current house.
Prices can only go down from here.
5. ketha said...
to be fair i'm not sure how much pity we should have with someone who has their own house worth 125.. neg eq or not.... this idea that it's a social entitlement to be able to 'trade up' every few years appears to still be with us.... apparently the press have learned that houses can go down, as well as up... not that the whole culture is becoming dysfunctional due to excessive materialism.
6. sybil13 said...
The FSA have said the same thing yet whilst we discuss sensible lending policy lenders contd to lend 5x's income and the government is about to authorise the BOE it would seem to PRINT PRINT PRINT another 50bn or more to support an inflated market. The guy on property watch this week buying that terrace that looked like a slum was having to borrow 5x's his income and could not find the £2500 he needed to sort the wiring to get his full mortgage from the lender. How can everyone be talking about sensible lending levels and not allowing another boom / bubble whilst doing all in their powers to continue to support the last one? I suppose the BOE is about to print a lot more money to help the people turned away from the Home Buy Direct Scheme
7. ketha said...
Oh, and for regulation on how banks lend, whilst it makes sense on paper I don't think it's the way to go about it. 5% deposits make sense but even Northern Rock used unsecured debt to get around this issue, only lending 95% secured.... no, I feel that the problem was more about the leveraging of banks. If banks have 'endless' amounts of money to lend out and can sell on the risk they will be sloppy with who they lend to; limit this and you will find banks will suddenly class a whole group of people 'high risk' that were previously 'moderate'.
Banks need to set their own risk limits, using their own money... if they want to lend 120% mortgages that's fine but if they screw up they go bust they should never be 'too big to fail'. The trouble with 'consumer level' regulations is they're easy to remove once people forget... the changes need to be deep and structural and based on 'basic principles' like with the Anti-Monopoly laws. Anything else gets eroded over time.
8. Gasbag said...
The problem is being compounded by the fact that the system is open to gazundering. Contracts should be signed by noth parties, once a purchase/sale has been agreed, and should have 3 day, and not 3 month, cooling off period. Inspections should be provided/guaranteed by the governement or council, at short notice.
None of this will prevent massive falls, but will at least help to unfreeze the market.
9. peeping tom said...
Maybe I am being harsh but most of these negative equity 'victims' have brought it upon themselves through taking out a mortgage without paying any deposit, lying about their incomes and / or living on equity withdrawl.
10. growler said...
@8. I am sure that there is some element of this. But I also think you can't blame the lemmings for falling into the river and drowning having been mesmerized by the sweet sounds of the property flautists.
I think it ought to be 10% + 3.5 times annual income. If you are not PAYE, then your accountant should be required (and be responsible) to make a statement of your annual income. Account rather than salesman of the loan so that independence is more likely to be assured.
11. confused76 said...
May I join in the discussion?
the LTV element is for the protection of the lender, while the income multiple is for the protection of the borrower (makes sure the loan is serviceable and owner does not lose the house). The income multiple is a proxy for the more straighforward income interest cover, but if you assume an average interest rate over the cycle and an average tax take and living expenses you get to a multiple, eg 3.5x
if you aim to have a smooth housing market then can set the LTV to cover for the expected volatility (+/- 10% in countries like Germany, but probably +/- 20% for the UK is more appropriate). So say LTV = 100- 20 = 80%
then for affordabilty. maybe you want max 30% of joint take home pay after tax to service interests, and you allow for interest only loans. average int rate over the cycle assume 6% and aavg tax rate assume 30%
loan x int% = 30% x gross salary x (1 - tax%)
loan / gross salary = 30% (1-30%) / 6% = 3.5x
12. confused76 said...
...so, if you agree with the above, to calculate the income multiple
those in stable profession and with a good pension plan, health cover etc you can take 100% of their base pay and say 50% of the average bonus for the past 5 years
the self employed take 75% of their average income before tax for the past 5 years
13. (cr)ash said...
crunchy @1 - B. Brown? I don't remember Bobby Brown ever being PM.... Although, he probably would have made a better job of it!
14. cyril said...
@confused76: I agree we should have say 3.5x income multiples but this won't solve the negative equity problem, it will make it worse. The only 'macro' measure available it seems to me is inflation, achieved by printing more money. Then, when things are back to normal (i.e. unsustainable growth) there will be a different crisis for someone to worry about.
15. house said...
I have only one think to say. Ban all interest only mortgages. It is ironic that if you went to the bank and asked for a £150k overdraft they would probably say on your bike and yet they were happy to lend interest only mortgages (up to 125%) which in my opinion is no different from an overdraft. When do these borrowers expect to pay the capital. What a fiasco.
16. confused76 said...
@ciryl
I agree, inflation will be the panacea
that is why i have been banging on the need to protect one s savings against it even if it means buying shares, if you choose those companies that are to take max advantage from the scrapping of all anti-competitive regulations over the past year
banks for instance have now a licence to print money
cash and bonds will lose
the negative equity is a non problem. at the end of the day return on asset is the same (negative in this case) if you have a lot or zero or negative equity in it. solvency is the problem, regardless. if you can sit on the investment you wait for better times, if you must sell now, it s bad in positive or negative equity.
negative equity is a problem for the banks! but who cares bout lining the fat cat pockets
more that fall in price what is paralysing the housing market is the spread between bid and ask. that is in fact what some in this forum called the lack of available credit. remember, financing has nothing to do with fair price valuation. "credit not available" is a red herring.
today credit is perfectly available but, different from a year ago, the cost of debt fully reflects the risk of debt.
if you want a 100% LTV loan and are in a shaky job, be prepared to pay 33% annual interests, i can find financing for you.
for a 125% LTV, probably a 200% annual interest will be appropriate
it s when debt cost is below the actual risk that financing becomes an element of the asset price equation, but clearly leads to a price distortion, moving away from fair pricing (in other words... a bubble)
vice versa, if you believe today's debt is priced above underlying risk, then assets are undervalued , so go out and buy a house (but remember what i said about the bid/ask spread)
17. bleakhouse said...
Inflation would indeed be a panacea to all the evils of debt in our system.Still the government are doing their level best to achieve it.
They've done quite well on currency devaluation and have started QE. But they really need velocity of money to get things going. As with any market you need volume of deals. I don't see how they can affect velocity. For instance as consultants we've had less work this year, so we've replaced the coloured 30yr old bathroom suite doing the work ourselves. Money hasn't come in to us, or gone out to bathroom fitters. And although its said you must speculate to accumulate, no one wants to speculate at the moment, just hoard their stash or pay down debt.
18. letthemfall said...
drewster
I think bleakhouse means pent up demand from sellers, which is broadly true given all the stuff we read about letting out while waiting for the market to "recover". But many will not be able to continue with this strategy and remain solvent. Sooner or later people will have to sell, unless the entire country decides never to move, or rent each others houses (I assume few will be able to service 2 mortgages as rents edge down - and especially when interest rates edge up). As gilt yields rise, as they gradually are, fixed mortgage rates will rise too (see Telegraph article above), and if inflation increases (a fair bet) then standard rates will join them.
19. letthemfall said...
house
This is the crux of the matter - cheap loans but only for housing, which has special tax treatment. Maybe we should call a bank and ask to borrow 10 times our salaries (interest only) to invest in a carefully allocated wide range of assets, the loan to be repaid when we've made a mint. A better risk than housing.
20. timmy t said...
In my view the limit should be the lower of a max LTV (Probably 90%) and a multiple of income (3.5x) - these caps could be lowered over time. Confused is right - one protects the lender, the other protects the borrower. And both need protecting as we are now finding out. The income multiple stops bubbles forming, and because bubbles can't form, they can't burst, so 90% is acceptable, but still allows a cushion. There clearly needs to be a bit more science put into the level of the caps but you can see what I mean.