Sunday, Mar 07, 2010
HPC or fizzle out?
Observer: Lost decade for HP
Sensible analysis from a number of sources.
Posted by chrisch @ 08:33 AM (1743 views) Add Comment
21 Comments
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1. devo said...
disappointingly, they didn't ask me for my opinion
2. taffee said...
where do they get these people...market never ever plateau...they either go up or down
1/ftse 100 20% lower than 1999
2/oil fell from 1980($36..real price) to $9 in 1999
3/gold fell from$850(real price) to $220 in 199
4/prices in us down 36% over 4 years
5/prices in japan down 90%..yes 90% over last 19 years
bubbles never ever peak and stay there...because they are bubbles
3. hpwatcher said...
It's a rally, and will run out of steam, but it's a bit premature to be writing off the whole decade.
4. estrader said...
“thousands of people relied on property to fund their retirement, homeowners will have to change their attitude.”
This IMO has been a major part of the problem. Even though some suggest that a mortgage is a type of investment because you eventually own something, it can be false economics. Someone much older and wiser than me said that “a mortgage is a mortgage and a pension is a pension”, basically, they are not interchangeable in the way most average people believe. People will say that renting is ‘dead’ money but using the figures in this article you can see how much ‘dead’ money goes into interest payments.
Is renting better than buying?
Assuming the average house is £165997 as stated in the article. Someone with a 10% deposit would need to borrow £149397 which results in a mortgage payment of around £872.49 (approx) over 25 years.
In the first year alone approx 70% of the monthly repayments goes into interest alone, ie/dead money. This means that out of the £872.49 monthly payment, around £621 is interest and £251 is principle (1).
In my area I can rent an equivalent property for around £650/month - ie/ dead money. But, it leaves me around the same £250/month available to invest in another asset class which can perform similar to property such as commodities, shares, bonds or you could even play it safe with compound interest in a term deposit.
Every mortgage payment made reduces the principle and interest but likewise any returns on your alternative investment reduce your rent.
I don’t take many factors into account like cost of ownership of a property such as building insurance and maintenance nor do I include rental increases, but remember there is also the chance of interest rate increases. The above figures are in short, what is the best thing to do ‘right now’ so to speak.
(1) http://www.abacusfinance.co.uk/repayment-calculator.php
5. Tochinoki said...
"Fathom's monthly Auction Price Index, released tomorrow, is expected to show that properties were fetching 21% less at auction than on the conventional market last month. That suggests the savvy investors who buy at auctions believe prices are riding for a fall."
6. taffee said...
great post estrader
so what happens if interest rates go up?....the investment price falls and the payments go up..if you were renting then rents may increase,but not guaranteed...fixed income will obviously get a good a decent return
One thing missed by alot of people is that the majority of mortgages are interest only....scary stuff
7. alan said...
Yes, Taffee,
IRs are key. If we go back to a 3 or 4% BoE rate that would push mortgages up considerably. Especially those BtL people who came in at the end of the bubble. I remember paying 11% when I took out a loan with NatWest. A 3% BoE interest rate right now would cripple a lot of banks as they will have to deal with a lot of foreclosures from people on trackers.
Trichet and Bernanke are getting ready to lift rates (reuters suggest). I guess the rise will only be small at the outset, but how is the global economy going to reconcile the needs of many sovererign nations who want to continually increase debt?
In the article, Ray "estimates that 3.5 million of the 10 million residential mortgage-holders have been left unable to move house, following the collapse in prices in 2007 and 2008 and restrictions on lending by cash-strapped banks". I'm surprised its this high - didn't most mortgage owners buy before 2003/4 when prices really jacked up?.
8. taffee said...
no...the point they are making is that they cannot port their mortgages without re-applying and alot of people no longer fit into the criteria,particularly the liar loans,so they have no choice but to stay put...many couldn't even rent theirs out and rent another as they would fail the rental checks!
sounds like a potential time bomb!....no wonder darling said if we raised interest rates the economy would collapse
I know a mortgage adviser who works for a high st bank who said he regularly sees people earning around £25,000 pa with mortgages of over £200,000 who want to remortgage to pay off credit cards
9. stillthinking said...
As a side note, the place where I work is recruiting. Decent salaries and a nice place to work. Based outside London though. They can't find anybody willing to relocate. I wonder who can?
For anybody who lost their job or who loses their job, mobility is a great thing to have. Make sure you have a look at jobs advertised in obscure locations because you might fluke on an employer choice of just you or nobody.
10. alan_540 said...
So they can't raise interest rates or else mortgage holders are gonna go bust? Since when has that stopped them... Oh yes, I remember, there's an election round the corner!
Caveat emptor.
11. mander said...
Interest rates would have to go up after election and house prices will probably register 2 years of falls.
12. mark wadsworth said...
Good post estrader.
It's a cultural thing though we've had it drummed into us that you only really count as a person if you are a homeowner. But if kids at school were taught proper maths and economics, then there wouldn't be so many property price bubbles (and we'd all be campaigning for land value tax and liberalising planning laws).
As to the article, we all know that prices have to come down at least another third, but will this be two or three years of glorious crash, or slow and drawn out, a couple of per cent a year (or nominal price falls of nil) for a decade or more?
13. alan_540 said...
I don't buy into this broadly flat for 10 years stagnation, has this ever happened anywhere else?
I agree with taffee @2
14. icarus said...
"Prices will struggle to rise in real terms for at least 10 years". In other words it will be a 'struggle' for house prices to become even more unaffordable. Poor old house prices. They're up against it.
15. taffee said...
you need only look at the graph in the header of this site to see what houseprices do
japan
http://www.globalpropertyguide.com/Asia/Japan/Price-History
and this is after 19 years of falls
http://www.propertywire.com/news/asia/japan-property-sluggish-prediction-200912083739.html
16. alan_540 said...
And going by the Nationwide graph on this site, it looks like we're in for a decade (give or take) of downward trend - this is where I think this article is coming from reading between the lines. We're told that the UK will be unable to inflate it's way out of debt so I assume this means that the houseprice falls will be real and sustained.
17. taffee said...
so that the japan problem of DEFLATION...as they couldn't re-inflate the bubble even with low interest rates(almost zero)...wages were falling and banks had been bailed out but refused to lend on over inflated assets...its a spiral
even today the average japanese person mentality is that prices of anything in japan will be lower next month
however,after 19 years it could be a good buying opportunity as all trends change at some point.
18. alan_540 said...
Bit of a long way to commute...
19. taffee said...
I'm international
20. Ken Gilmour said...
Somebody said something about teaching children mathematics and economics. Don't even mention them in the same sentence. Mathematics is an utterly rigorous subject. Economics is not. It is not science, and should be lumped in with astrology and fortune telling. It's entirely based on what's happened in the short term past, where crude cause and effects can be half recognised without any clue as to how or why, and no rigorous testing of theory. And, really how can it be anything else where the process has a zillion degrees of freedom, the rules are constantly changing and wholesale clandestine manipulation is used. It's like trying to predict the shape of those great flocks of starlings from one minute to the next. That's why we have so many different opinions from the so-called experts.
If you want to teach children anything teach them spelling. I'm afraid I can't take the opinion of anyone seriously if they don't know the difference between principle and principal. That's my principal principle.
21. Goldbug9999 said...
"even today the average japanese person mentality is that prices of anything in japan will be lower next month"
I don't see why this is bad thing. If an economy cant survive a situation people only buy what they need and only when they need it, then something is fundamentally wrong. Also there are many things that are getting cheaper all the time and this doesn't seem to be a problem: consumer electronics (mobile phones, computers etc etc), white goods (a basic microwave oven is now less than 1/10 th the price in real terms than it was 20 years ago), musical instruments.
In plain common sense terms I simply cannot accept the idea that things continually getting cheaper is a bad thing.