Wednesday, Mar 17, 2010
Is the HPC agenda gathering pace?
Guardian: "If you want cheaper housing, turn back the clock"
The impact of such proposals, if implemented, would be profound. There would be no more 100% mortgages, let alone the 125% mortgages once offered by Northern Rock. Instead, anyone who wanted to buy a house would have to save for a deposit first. House prices would fall.In the UK of 2010 this all sounds like revolutionary stuff. But it was the norm for the first quarter of a century after the second world war, and in Germany or France such restrictions on credit would still be seen as prudential.
Posted by mick rupert @ 09:45 PM (1648 views) Add Comment
35 Comments
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1. devo said...
hello!
home loans have been less easily available since the onset of the credit crunch in 2007
epic fail!
printy printy
2. paul said...
It was not just the norm after the second world war, it was the norm until about 2003.
That was more or less when the baby boomers began retiring too. But that's a complete coincidence. Of course.
3. devo said...
You may think mortgages have been around for hundreds of years -- after all, how could anyone ever afford to pay for a house outright? It was only in the 1930s, however, that mortgages actually got their start. And, it wasn't banks that forged ahead with this new idea; it was insurance companies. These daring insurance companies did it, not in the interest of making money through fees and interest charges, but in the hopes of gaining ownership of properties if the borrower failed to make the payments on it.
http://home.howstuffworks.com/real-estate/mortgage14.htm
4. dbc reed said...
Larry Elliott does not mention that the Tories got rid of an effective tax on house prices (Schedule A which came out of Income! )before making more credit available.BTW true baby boomers born in say 1945 would have being buying their first property in the modern era of yo-yo house prices,the first spike being 1972-ish.
As usual with Elliott the sting's in the tail (last words in fact): no politician is going to risk losing elections by pissing off the homeowner bloc vote.Ever.
5. mark wadsworth said...
Yup, let's turn back the clock to the 1950s or 1960s...
1. Schedule A taxation and Domestic Rates (= property value tax, like in Northern Ireland) As ever, dbc has beaten me to it.
2. Lots more home-building, whether that's for owner-occupation or social housing is neither here nor there.
3. Sensible lending, low LTVs, low loan-to-incomes etc.
That'll fix it.
As for pissing off the Home-Owner-Ists, it's a failed economic policy which is now starting to bite them in the 4rse, they have to remortgage to help kids raise a deposit and so on. Give it another five years and a majority will be crying out for lower house prices.
6. devo said...
7. braindeed said...
mark wadsworth @ 5 said...
2. Lots more home-building, whether that's for owner-occupation or social housing is neither here nor there.
I hate saying this, but.......Housebuilding is a huge element in our post-industrial GDP - increase that. and the country becomes more attractive to economic immigrants...you work out the rest.
8. alan said...
Perhaps the key is interest rates?
At the moment, if IRs stay unchanged, prices will flatline - if they go up, prices will drop quickly.
When will be the next upward move in IRs? I thought we would be getting back to "normal" (5 -6%) by now.
9. devo said...
funny how we read the same stuff wadsworth, yet draw different conclusions
you see a little twiddling with a tax here and there, then the job's a good 'un
i see a global economic collapse
10. luckyjim said...
This does fly in the face of the theory that there is a 'long term' average for house prices (4x income) and that we will eventualy return to that average - regardless of taxation, house building and lending restrictions.
I've always argued that any trend that includes data earlier than 1979 is irrelevant. The days when people on average incomes could afford decent family homes off their own backs are long gone and not coming back any time soon.
11. gone-to-colombia said...
I am certain that another significant drop in house prices in on the way. It seems to me that we are running out of options that will postpone the inevitable. The Brown government has been doing all it could to keep prices high to secure the next election.
No matter which party is returned to power, they will have to make deep cuts.
12. dill said...
Although Larry Elliot hasn't said it, he's effectively asking the Establishment to 'grow a pair'. If that's the case, I;m with him on the call, The UK cannot continue using notional values of bricks and mortar as an excuse for an economy. If it chooses to do that, then, one way or another, there WILL be civil unrest. This nation has it coming.
13. mark wadsworth said...
Devo, I shall rise to the bait: "you see a little twiddling with a tax here and there, then the job's a good 'un... i see a global economic collapse" These collapses only happen when a bubble bursts. If you prevent credit/asset price bubbles occurring in the first place, then there can't be any collapses either.
Luckyjim: "The days when people on average incomes could afford decent family homes off their own backs are long gone..." The 1990s aren't that long ago, are they? At the time, second hand houses cost about as much to buy as their bricks and mortar replacement cost - there was no land value, no bubble element, it doesn't get much cheaper than that.
14. This comment has been removed as it was found to be in breach of our Blog Policies.
15. devo said...
13. mark wadsworth said... These collapses only happen when a bubble bursts.
the bubble has burst, but as you can see from the graph above, the effects have been temporarily averted.
your solutions are premature at best; irrelevant at worst.
16. tenant super said...
"Give it another five years and a majority will be crying out for lower house prices."
This is an interesting question. How many homeowners have priced-out adult children? My father is a classic case. His eldest three children are owner-occupiers, the next one rents and the next stuck at home and the youngest in student accomodation. He really wants prices to fall despite sitting theoretically on almost half a million quids worth of equity.
Whilst most of my friends parents only had two or three children who managed to buy, we're slowly at the turning point with more and more adult children priced out,
17. Topher Bear said...
I agree that any meddling in housing is a vote loser.
This last weekend I spoke to my dad (a 1946 boomer) about the idea of switching from stamp duty to some form of capital gains on main properties, he was outraged at the idea. In his eyes taking any money off the vendor will prevent them being able to afford the next property. So despite having a nearly 40 year old son with family priced out he still doesn't see the need to sort out house prices, and if works in the stock market (maybe thats why he is so blinkered)
For the moment there are more boomers and pensioners than priced out/ debt ridden generation x's!
18. uncle tom said...
Words like 'horse' 'shut' 'gate' 'after' & 'bolted' come to mind..
While good in principle, turning back the clock overnight is not so easy. The old system also had a significant flaw, in that mortgage rates were almost always variable, leaving borrowers vulnerable to inflation.
I personally favour a national standard mortgage: a repayment one that has a maximum 90% advance, moderate income multiplier, and a fixed rate for the whole term. Mortgages that complied with the national standard might enjoy a modest subsidy, while non-standard deals might be subject to a small levy - the carrot and stick cancelling each other out.
19. estrader said...
@16 -"The old system also had a significant flaw, in that mortgage rates were almost always variable, leaving borrowers vulnerable to inflation."
How is that a flaw? Houseprices, wages and interest rates should all be linked to inflation, the system would be more sustainable. Inflation leaves creditors vulnerable to inflation as well, you don't get something for nothing, no matter how much Gordon Brown tries.
20. uncle tom said...
estrader,
If the money to fund fixed rate mortgages is raised on the bond market, the inflation hazard is transferred from the homeowner to the corporate investor; thereby placing the element of risk in the hands of those who are better able to accommodate it.
21. mark wadsworth said...
@ Tenant - fingers crossed, eh?
@ estrader, excellent rebuttal. Plus nobody said there should be a law against long-term fixed rate mortgages - however, experience shows that in the long run you're better of with variable rate. Something that the banks should offer (and it is a mystery to me why they don't) is to have variable interest rate but fixed repayments, i.e. you take out a mortgage of £100,000 with fixed annual repayments of (say) £8,400 a year (£700 a month). If rates are below 8.4% you are paying off capital; if they go above 8.4% you are effectively MEWing. As long as the average interest rate is rather less than 8.4%, then sooner or later you will have paid it off, quite when is irrelevant, as it's the monthly cash outgoing that matters, not a number on a bit of paper at the bank.
22. mark wadsworth said...
@ UT, exactly - that's why we have a "yield curve" - as a general rule, long term fixed interest rates (whether depositing or lending) are higher than short term or variable rates - the borrower it prepared to pay a bit extra as insurance against inflation/interest rate rises; and the lender charges a bit extra as insurance against, er, inflation/interest rate rises. The markets sort this out.
23. ontheotherhand said...
MW @ 19. What an excellent mortgage product that would be. I can think of two reasons why it doesn't exist.
1. Legacy technology cannot handle the calculations. Most banks have old mainframe type systems that want a principal repayment ladder input at the outset. This is also the reason why so few banks offer offsetting mortgage and savings products whereby instead of being paid interest on my savings and taxed on it, the bank transfers the interest gross to repay part of the mortgage. Makes sense right? Most banks can't do it on their systems.
2. If these mortgages were pooled and resold they need a new breed of buyer who can calculate and speculate on the prepayment risk. In the US most mortgages can be repaid early and so when interest rates are dropping there is a big remortgaging industry. The mortgage investors there understand this and they don't like it when a mortgage is prepaid early and so they have models calculating prepayment risk. Your new product suffers ongoing prepayment when interest rates drop. The risk can be calculated of course, but it's just new that's all.
24. estrader said...
@18 - UT, what Mark says, plus, No offence, from what you say, I'm not sure you fully grasp what inflation is when you say things like " in the hands of those who are better able to accommodate it." Inflation affects food, fuel and basically all goods and services, it isn't selective and doesn't care who you borrowed money from.
25. uncle tom said...
Mark,
The idea of fixed payments is an interesting one. The obvious problem with the idea is that if inflation took off, the final redemption date might disappear into the next century. Fixed payments that are index linked would work though.
26. uncle tom said...
estrader,
I was around in the 1970's - so I DO know what inflation is!
27. ontheotherhand said...
I love, "Rising house prices simply transfer wealth from young people to their parents." Most people don't get this. Most people follow the media who say "wealth has been created" when house prices go up. They don't understand that they only way wealth is created is by producing things and services, and doing more of it as a nation each year. When an extra $100bn gets borrowed in mortgages and house prices go up, no wealth has been created as a nation. All that has happened is that the future earnings of the new mortgagees have been transferred to the retirees selling up.
28. letthemfall said...
The question of vulnerability to inflation arises in relation to multiples of salary borrowed. Real interest rates are what really matters over the long term, but a rise in inflation (and so interest rates) hits cashflow immediately; when there is no buffer, because the holder borrowed too much, is when problems arise. So a rise in rates now would bring the house of cards down. (How d'you like my metaphor?)
29. estrader said...
@24 OK, but IMO, your suggestion @18 would almost make property an absolute guaranteed investment against inflation, probably one that not even gold can promise. Houses would become even more expensive. Imagine, the creditor taking on all inflation risk...who wouldn't borrow and buy as much property as they could!? Why do you think NS&I limit purchases in index-linked savings certificates to £15K per issue? Because they are GUARANTEED to beat inflation!
30. Neil B said...
Wake up! There are no more 90%+ LTV mortgages.
31. letthemfall said...
Land is pretty much inflation-proof is it not? It's an asset with fixed supply and has always tended to increase at the rate of earnings.
32. mark wadsworth said...
@ OTOH 21, surely the banks can sort out the computers to do this? It is not complicated. I don't get your point 2. These are just variable rate mortgages, the tweak is that repayments are fixed.
@ UT 23, indeed, we can do index-linked fixed payments, even better, each to his own.
But even if there were no index linking, so what? It sorts itself out... Maybe inflation and interest rates hit 15% soon after you take out the mortgage, you're only paying £8,400 a year, so your capital outstanding increases by £6,600. So after a year, you owe £106,600. But, adjusted for inflation, that loan has actually gone down by about seven per cent - it's called inflating away debts.
33. estrader said...
@28, The only thing close to being 'inflation proof' are NS&I ILSC, anything else is a guess, 'intelligent' or not.
34. Tomwatkins said...
Made it to the big board.
35. ontheotherhand said...
MW @32. The repayments are fixed I agree, so that if interest rates drop then the householder starts to repay more principal. With me so far? Now the buyers of securitised mortgage pools do not like that uncertainty, they don't like early repayment of principal. To them it's called 'prepayment risk'. They wanted to plan at the outset lending a certain amount of money for a certain interest rate and that asset matches their liability obligations. Perhaps it is a pension fund investing in a mortgage pool that matches the interest repayments against its outgoing pension payments. If it suddenly finds that all the mortgages are getting paid back early it's a pain in the neck for them. Easier to have a nice predictable government bond.
As to banks sorting out their computers not being complicated, you must be joking. Why do you think the staff in the branch can only help you with data less than 3 months old for example? A. The rest is on a different system. Why do you think the hole in the wall only knows your cleared balance as of a certain time yesterday? A. The various systems accepting deposits are separate from the ATM systems and they sync. at night. etc. etc. ad nauseam. Look at the Virgin One account where they sweep your interest gross into your mortgage principal repayments. Why can they do it and not the older banks do you think?